Bed & ISA applications jump 206% in February

interactive investor reports significant jump as shrinking CGT and dividend tax allowances loom.

• The pressure is building, and the clock is ticking: for interactive investor customers, the online Bed & ISA instruction deadline is 4.30pm, Friday 31 March
• Applications have been rising since the changes to CGT and dividend tax allowances were announced in the Autumn Statement.

Ahead of the shrinking of the capital gains and dividend tax allowances from the new tax year, the pressure is building, and the clock is ticking for investors with assets held outside a tax wrapper.

Investors appear increasingly focused on tax planning as the first line of defence to preserve capital. With the tax year end (5 April) looming, there has been a significant jump in online Bed & ISA applications among interactive investor customers.

• Learn with ii: What is Bed & ISA? | What is the ISA Deadline? | How many ISAs can I have?

In February alone, Bed & ISA applications were up 206% year-on-year compared to February 2022, the biggest year-on-year monthly rise since numbers started climbing following the Autumn Statement.

This follows an 122% year-on-year increase in applications in January 2023 - the same month that a poll from ii found that tax planning was the number one financial priority for one in eight investors going into 2023.

The Bed and ISA rush for ii customer’s began in November 2022. Bed & ISA applications in November and December rose by 72% and 90% year-on-year, respectively.

This coincided with sweeping changes announced in the government’s Autumn Statement in November last year. The Capital Gains Tax (CGT) threshold will fall in April 2023 from £12,300 to £6,000 and then again to £3,000 in April 2024. The dividend tax threshold will also be reduced from April from £2,000 to £1,000 and £500 in April 2024, for individuals who receive dividend income.

Bed and ISA involves transferring assets held outside a tax wrapper into an ISA, so that future investment growth and income is sheltered from tax. It can also be a useful way to take advantage of any unused ISA allowance, especially if an investor has less ‘new’ money to invest, whether due to the cost-of-living crisis or anything else.

Customers will pay a trading fee on the re-purchase, not the sale. Customers will also pay stamp duty and market spread costs. Interactive investor has been lobbying for stamp duty on investment trusts to be scrapped, because investors do not pay stamp duty on open-ended funds.

CGT is payable on any profits above a person’s annual allowance, but moving the investments to an ISA means you won't pay CGT on those profits in future.

interactive investor has always offered a Bed and ISA service, on an uninterrupted basis, even through the pandemic restrictions.

The same is true of Bed and SIPP, where investors have the option to sell investments and use the proceeds to make a pension contribution to a new or existing SIPP. As well as CGT considerations, there are other things to consider: since investments moved into a SIPP will count as a contribution, there are potential annual allowance considerations.

Clock ticking on Bed & ISA

There is usually a cut-off point for Bed & ISA transactions a week or so before the tax year-end.

For interactive investor customers, the Bed & ISA instruction deadline is 4.30pm on Friday 31 March. This deadline is for online instructions - telephone requests will be dealt with on a best endeavours basis after this time.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “A bitter cocktail of tax freezes and some reduced allowances mean that while headline tax rates haven’t risen, we’ll be paying more in tax over the coming years. But making the most of tax-efficient wrappers like ISAs and pensions could help protect your wealth from the taxman’s clutches.

“The impending swingeing cuts to the CGT and dividend tax threshold provides the impetus for investors to invest through a tax-efficient wrapper if they haven’t already done so. Many of our customers were quick off the mark to do so after changes to both taxes were announced.

“Shifting investments into an ISA protects future gains and dividends from the clutches of tax. It also means that you will no longer have to declare them on your self-assessment tax return. Bed & ISA is also a valuable tool as a part of a broader portfolio spring clean strategy.

“There might be CGT implications, depending on your circumstances as Bed & ISA action is treated as a sale for CGT purposes. This means that gains that exceed the current annual CGT allowance is liable to tax.”

What’s changing and how will this impact your wealth?

Alice Guy, Head of Pensions and Savings, interactive investor, illustrates the significance of some of the upcoming changes with some examples:

“The CGT threshold is being cut by half in April and then a quarter the following year. It means that if you make a gain of £12,000 after April, you’ll owe tax on half of it compared to none now.

“A taxable gain of £12,000 will attract no tax this year, but next year you’ll be paying £600 or £1,200 to the taxman, depending on your tax band. By April 2024, a gain of £12,000 will attract CGT of £900 or £1,800.

“The simplest way to avoid the uplift is to sell assets before April 2023 when the allowance is reduced.

“If you’re planning to gift assets to someone else, then it could be worth making use of your annual CGT allowance this year before it’s reduced. Many people don’t realise that you also owe CGT on assets gifted to someone else. The gain is based on the market value at the time of the gift. But tax-planning decisions are complicated and it’s important not to let the tax tail wag the financial planning dog.”