Jump in Bed & ISA applications ahead of tax year end and shrinking allowances

interactive investor sees rise in applications as tax planning takes centre stage amid changes.

• January 2023 sees online Bed & ISA applications more than double year on year, up 122%
• In December 2022, online Bed and ISA applications were up 90% year on year
• In November 2022 online Bed & ISA applications rose by 72% year on year
• For interactive investor customers, the online Bed & ISA instruction deadline is 4.30pm, Friday 31 March

There has been a significant jump in online Bed & ISA applications among interactive investor customers over the past three months, with tax efficiency perhaps front of mind as cuts to Capital Gains tax (CGT) and dividend tax thresholds loom.

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

The biggest percentage increase came in January 2023, with online Bed and ISA applications up 122% on January 2022.

This was in 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, with the Bed and ISA rush for ii customer’s beginning in November 2022.

This coincided with sweeping changes announced in the government’s Autumn Statement in November last year. The Capital Gains Tax 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.

Capital Gains Tax is payable on any profits above a person’s annual allowance, butmoving 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 Capital Gains Tax considerations, there are other things to consider: since investments moved into a SIPP will count as a contribution, there are potential annual allowance considerations. Despite Bed and SIPP being a less straightforward process, Bed and SIPP transfers in January 2023 were up 54% on interactive investor compared to January 2022, albeit from a lower base than Bed and ISA applications. The tangible increase started a little later, in January 2023.

Rush to preserve wealth

Online Bed & ISA applications on ii in November 2022 (the same month these all-important tax changes were announced) rose by 72% on November 2021.

In December 2022, online Bed and ISA applications were up 90% compared to December 2021.

In January 2023, online Bed & ISA applications were up 122% on January 2022

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, 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, Personal Finance Editor, interactive investor, illustrates the significance of some of the upcoming changes with some examples:

“The capital gains tax (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 capital gains tax 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.”