Interactive Investor

Busiest-ever January at ii for Bed & ISA applications

Tax efficiency is likely to be front of mind as further cuts to the capital gains and dividend tax allowances loom, says interactive investor.

6th February 2024 09:21

Myron Jobson from interactive investor

  • 2023 record-breaking year for Bed & ISA requests – up 53% in the year compared to 2022
  • Calculated: interactive investor outlines what cuts to capital gains and dividend tax allowances mean for basic and higher-rate taxpayers.

interactive investor recorded its busiest January for Bed & ISA applications, with tax efficiency likely to be front of mind as further cuts to the capital gains and dividend tax allowances loom.

Bed & ISA instructions saw a 7% increase in January 2024 compared to the same period in 2023, with the capital gains exempt amount and dividends allowance set to halve to £3,000 and £500, respectively, from April.

Both allowances had already been cut at the start of the 2023-24 tax year – from £12,300 to £6,000 for capital gains and £2,000 to £1,000 for dividends.

As a result, 2023 proved to be a record-breaking year for Bed & ISA applications, up 53% in the year compared to 2022.

The biggest percentage increase came in ISA season 2023, which covers from February to the start of April, with request up 60% on the period in 2022.

Bed and ISA involves transferring assets held outside of 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.

Customers will pay a trading fee on the re-purchase, not the sale. Customers will also pay stamp duty and market spread costs. Capital gains tax is payable on any profits above a person’s annual allowance, but moving the investments to an ISA means you won't pay capital gains tax on those profits in future.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “We’re facing the highest overall tax burden in a generation thanks to the deep freeze of tax thresholds and allowances which, in tandem with wage inflation, means we’ll be more in tax in the years to come. 

“The shrinking capital gains and dividend tax allowances provide the impetus for investors to invest through a tax-efficient wrapper if they haven’t already done so. Shifting investments into an ISA protects future gains and dividends from the clutches of tax. Known as Bed & ISA, the process is a valuable tool as part of a broader portfolio spring clean strategy. The transfer, however, will involve selling and buying back shares, which could trigger a capital gains tax bill.

“Bed & ISA is a tried and tested route to wrapping existing investments to generate the long-term benefits of a tax-efficient ISA – which over the long term is likely to outweigh the charges that might apply.”

Calculated: the impact of cuts to capital gains and dividend tax allowances

The tables below show the impact of cuts to the capital gains and dividend tax allowances across different investment gain levels.

  • capital gain of £5,000 will attract no tax this tax year but would be subject to a tax charge of £200 for a basic-rate taxpayer and £400 for a higher-rate taxpayer from the 2024-25 tax year. 
  • Dividend income of £1,000 will attract no tax this year but would be subject to a tax charge of £43.75 for a basic-rate taxpayer and £168.75 for a higher-rate taxpayer from the 2024-25 tax year. 

Changes in capital gains tax liability

Basic-rate taxpayer

Higher-rate taxpayer

 

2022-23 tax year

2023-24 tax year

April 2024 onwards

2022-23 tax year

2023-24 tax year

April 2024 onwards

Capital gain tax allowance

 £12,300

£6,000 

 £3,000

  £12,300

 £6,000 

 £3,000

Tax bill on £5,000 gain on shares

£0

£0

£200

£0

£0

£400

Tax bill on £10,000 gain on shares

£0

£400

£700

£0

£800

£1,400

Tax bill on £20,000 gain on shares

£770

£1,400

£1,700

£1,540

£2,800

£3,400

Tax bill on £50,000 gain on shares

£3,770

£4,400

£4,700

£7,540

£8,800

£9,400

Source: interactive investor.

Changes in dividend tax liability

 

Basic-rate taxpayer

Higher-rate taxpayer

Tax year

2022-23 tax year

2023-24 tax year

April 2024 onwards

2022-23 tax year

2023-24 tax year

April 2024 onwards

Dividend tax allowance

£2,000

£1,000

£500

£2,000

£1,000

£500

Tax bill on £1,000 of dividends

£0

£0.

£43.75

£0

£0

£168.75

Tax bill on £2,000 of dividends

£0

£87.50

£131.25

£0

£337.50

£506.25

Tax bill on £5,000 of dividends

£262.50

£350

£393.75

£1,012.50

£1,350

£1,518.75

Source: interactive investor.

Note: Gains from selling assets are charged at 10% for basic-rate taxpayers (18% for residential property), and 20% for higher-rate taxpayers (28% for residential property).

The rate of dividend tax you pay depends on your tax band: 8.75% for basic-rate taxpayer; 33.75% for in the higher-rate band and 39.35% for additional rate taxpayers.

Myron Jobson says: “If you’re planning to gift assets to someone in the near future, it could also be worth considering, making use of your annual capital gains tax allowance this year before it’s reduced. Many people don’t realise that gifted assets are subject to capital gains tax, which is charged on any profit arising, or treated as arising, on the gift.”

Bed & ISA deadline 

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, Thursday 28 March. This deadline is for online instructions - telephone requests will be dealt with on a best endeavours basis after this time.

Myron Jobson says: “We’ve all left things until the last minute, but it is worth checking with your provider to make sure you know just how much time is left on the clock. There is less time to get ISA-related applications in this year as the Easter Bank Holiday weekend falls earlier this year – the weekend before the new tax year – so you might want to act sooner, rather than later.”

interactive investor cashback offers

interactive investor is currently running two cashback offers until the end of February:

  • Customers opening a SIPP with ii (both new and existing ii customers, but excluding existing SIPP holders) could receive up to £5,000 in cashback.
  • New customers who open an ISA or GIA account with ii could receive up to £1,500 in cashback.

More information can be found here.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.