How investors are using Bed and ISA to protect against the Autumn Budget

It’s usually the end of the tax year when we see a flurry of activity around tax-efficient accounts such as ISAs and pensions. But with the upcoming Autumn Budget rumoured to include some sweeping changes, that flurry is already underway.

Since Labour won the general election in July, Bed and ISA instructions at Bestinvest are up by a quarter compared to the same time last year. Many investors are concerned about how Chancellor Rachel Reeves 30 October 2024 announcement could impact them and are planning accordingly.

A Bed and ISA and Bed and Pension – which allow investors to shift their investments from taxable to tax-effective wrappers – can be a beneficial strategy. But time may be running out for those who want to take full advantage of the current rules.

What is Bed and ISA?

Bed and ISA is a strategy where investors sell assets they hold in a taxable environment – such as a general investment account – and then buy them back inside a tax-free ISA.

The key benefit is that holding the investments inside an ISA will protect any future income or capital gains from tax, making your investment portfolio more tax-efficient over the long term.

The full Bed & ISA process generally takes up to 10 days, but this timescale can extend to multiple weeks for assets that first need to be transferred to a dealing platform to be sold.

As long as the sale is processed and the gain is crystallised (i.e. the final profit confirmed once the sale is complete) before 30 October 2024, investors can take their time to rebuy the assets inside their ISA to complete the Bed and ISA process. However, if the assets increase in price in the meantime, investors will miss out on those gains.

If completing Bed and ISA means selling an asset with gains above the CGT annual allowance (currently £3,000), it may result in a CGT liability.

The above strategies are based on tax rules in the 2024/25 tax year which may change in the future.

Why investors are rushing to Bed and ISAs before the Autumn Budget

There’s ongoing speculation that Chancellor Rachel Reeves will look to increase the rate of CGT at this Labour government’s first Budget. Some believe that we may even see CGT rates aligned with income tax rates, which would have a significant impact on investors holding assets outside of tax-efficient wrappers.

There is a chance that any new CGT regime will be implemented immediately following the Budget rather than from the start of a new tax year. There are precedents for this scenario, with the aim to prevent investors hurriedly crystallising gains before any new rules come into effect.

With these rumours circling, it’s no surprise that many investors are already taking action. The number of Bed and ISA instructions at Bestinvest have increased by 25% year on year since Labour won the general election and are up almost 90% compared to the same period in 2022.

With just a few short weeks until Reeves reveals the full extent of her plans, DIY investors that hold assets in a trading account, or even have share certificates sitting in a drawer at home, may want to consider their CGT position as a matter of priority.

How to carry out Bed and ISA before the Autumn Budget and considerations

While the clock is ticking to complete a Bed and ISA before 30 October 2024, there is still time. To make the process as efficient as possible, follow these simple steps:

1. Open a stocks and shares ISA, if you don’t have one already

Those with no ISA savings at all should open a stocks and shares ISA. You can also use an existing ISA or open a second ISA with another provider. ISA rules changed at the start of this tax year allowing savers to open and pay into multiple ISAs of the same type each year.

The total combined amount contributed to all ISAs must be within the £20,000 annual ISA allowance.

2. Check how much of your tax-free allowance you have left

The annual ISA allowance is currently £20,000 per person. If you’ve put money into any type of ISA in this tax year, you’ll need to check how much of this allowance you have left.

E.g. if you’ve contributed £10,000 into an ISA this year, you’ll only be able to complete a Bed and ISA for a further £10,000 and you won’t be a able to make any further contributions to any ISA for the rest of this tax year.

3. Sell your existing investments

Next, you’ll have to sell the investments you want to move into your ISA. Any capital gains over £3,000 per person will be taxable, so make sure you understand your estimated tax liability before completing the transaction. 

4. Move the money and reinvest

Your provider may charge a trading fee for selling and buying shares. Purchases of UK-listed shares (other than those listed on AIM) will also incur stamp duty of 0.5%, so factor those costs in.

There will almost always be a buy/sell spread between the sale and purchase price, so you could end up with slightly fewer shares in your ISA than you held previously.  

If you are moving to another provider, there is the chance of more price movement while the cash is transferred. Once the cash is added to your ISA, you can then buy back the same investments to complete your Bed and ISA.

The benefits of using tax-efficient investment wrappers

Many UK investors don’t realise the significant tax benefits that come from holding investments inside a tax wrapper such as a stocks and shares ISA or a pension.

Assets held inside ISAs and pensions are free from any future tax on interest, dividends and capital gains, so they offer an easy way to improve net returns without increasing risk, compared to having the same assets in a general investment account. But remember, all investing carries risk and you may get back less than the amount invested.

We’ve seen decreases in the CGT-free annual allowance and the annual dividend allowance in recent years, making it even more important for investors to carefully consider all their available tax options.

Don’t forget about Bed and Pension

It’s possible to use the same strategy to invest into a pension, such as a SIPP. In addition to tax-free growth and income, pension contributions also attract tax relief at the individual’s marginal income tax rate.

Most investors can currently contribute up to 100% of their salary into a pension (including employer contributions), capped at £60,000 gross and gain tax relief. This figure begins to taper down gradually once adjusted earnings hit £260,000, at a rate of £1 for every £2 over this amount. The minimum pension annual allowance is £10,000.

Topping up a pension before the Budget could be a wise move for some. Of course, it’s important to understand that these funds will be inaccessible until pension age is reached (currently 55 and rising to 57 by 2028), and investments in a pension can go down as well as up.

Those with larger amounts available for a Bed and Pension transaction can also benefit from carry forward rules. This allows investors to utilise unused annual allowance from the previous three tax years, once they have maximised their current allowance for this tax year, but the total contribution must still be within 100% of earnings.

Remember that tax treatment depends on individual circumstances and is subject to change.