Tips on shielding wealth from tax and inflation

Don’t forget handy tools like Bed and ISA, says interactive investor, with other tips to help make your money work harder.

The biting chill of creeping taxes and a cost-of-living squeeze highlights the importance of wrapping up your investments in a tax-efficient ISA (as well as keeping an eye on investment platform ISA costs, as interactive investor explores here.)

But with more budgets grappling with the rising cost of living, and increased tax burden, finding ‘new’ money for this year’s ISA won’t be getting any easier. But there is a handy tool to help, which not all investors may be aware of: Bed and ISA.

This is a great tool for those with investments outside a tax wrapper who haven’t fully used their tax allowance. Bed and ISA transfers involve moving that money into a more tax friendly ISA, although there might be Capital Gains Tax (CGT) implications, depending on your circumstances.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “It’s got to be one of the industry’s more bizarre terms, but Bed and ISA transfers are a handy tool – especially if you are counting the pennies more this year. It’s a good way to take advantage of any unused ISA allowance. Once in an ISA, those investments will be sheltered from tax.

“Bed and ISAs are the ultimate way to recycle money tax efficiently, allowing you to shift investments held outside of your tax wrapper, if you haven’t managed to fully utilise your ISA allowance this year. There might be CGT implications, depending on your circumstances, and it’s also worth watching the clock – ii’s deadline for Bed and ISA instructions is 4.30pm on 30 March. Remember too that not all investment platforms have been accepting these transfers over the pandemic, so it’s well worth checking with your provider.”

interactive investor’s ISA deadlines are available here and more information on the Bed and ISA process is available here.

Shielding from tax

In the March Budget last year, the chancellor froze a number of tax allowances until 2025/26, including the personal tax-free allowance and the higher tax threshold, the CGT and Inheritance Tax allowances. And with NI increases in April, there’s even more change on the cards, and who knows what the upcoming Spring Statement will hold as the government looks to pay off the bill for its coronavirus economic support packages.

Bed and ISA in detail

• Under the interactive investor Bed & ISA service, a customer’s chosen investments from their trading account are sold free of charge and then the proceeds are used to immediately repurchase the same holdings within the ISA. interactive investor only charges trading fees on the repurchase.
• If you have unused trading credit in your account, this will be put towards the cost.

Myron Jobson says: “When doing this, a smart move would be to prioritise any dividend-paying investments first, starting with the highest income generating investments into an ISA first, before working your way down. Dividends have started to recover after plummeted in the wake of the Covid-19 crisis. In 2021, UK dividends jumped by 46.1% in 2021 to a headline £94.1 billion.

“Income and capital gains released from ISAs are not only tax-free, but also don’t count towards any of the income definitions that determine or take you into a higher-rate tax band. For parents on the cusp of the Higher Income Child Benefit tax charge threshold, which has been frozen since 2013, it could be the difference between having to repay some of the benefit, or not.”

“For those with unwieldly portfolios, Bed & ISA is a valuable tool as a part of a broader portfolio Spring clean strategy.”

Becky O’Connor, Head of Pensions & Savings, interactive investor, outlines other tips on how to reduce your tax bill in the land of the big allowance freeze.

1. Pay more into your pension to reduce your income tax bill

You can contribute up to £40,000 a year into your pension (or up to your annual earnings) and still get tax relief at your marginal rate. If you can tighten your belt and put more into your pension via salary sacrifice, this can be a good way of staying below certain thresholds that would trigger higher income tax charges, whether that’s £50,270 or £100,000.

2. Don’t forget carry forward

If you want to max out your pension annual allowance but did not do so for the previous three tax years, you can use the unused allowances from these years now. Great if you’ve had a windfall and you don’t need the money until you retire and would like to make it as tax efficient as possible.

3. Use ISAs as well as pensions for retirement saving

If you are well on your way to the Pension Lifetime Allowance limit of just over £1 million, don’t forget that ISAs are good for retirement saving too. They don’t come with tax relief on the way in, but you can take income from them free of tax and using them can minimise additional tax charges you would incur through going over your pension lifetime allowance. The annual ISA allowance is £20,000.

4. Think about your Inheritance Tax liabilities

Rising house prices, while never a given, will increase Inheritance Tax liabilities on estates over time, although private residence reliefs are in place. Investments in your pension that are left in your pension are not considered part of your estate for inheritance tax and so can be a good way to leave money to family.

And don’t forget you can pay into Junior ISAs for children or grandchildren too. Thinking about your money as family money and making use of everyone’s allowances is a great way to do something to preserve your legacy today, rather than leaving it too late.

5. Don’t forget your spouse’s allowances

You can pay into your partner’s pension as well as your own.