With capital gains tax and dividend tax hikes coming soon, we explain how to use the Bed & ISA rules to save a big tax bill in 2023.
But there’s also a nifty ISA trick that you can use to protect any stocks and shares held outside an ISA. It’s known as “Bed & ISA” and works by allowing you to transfer shares, held outside your ISA, into your ISA before the tax year end.
Here’s more about how to use a Bed and ISA transfer and why it could help you save tax.
Capital gains tax hike
The capital gains tax threshold is changing in April 2023 to bring more of us into the net.
Capital gains tax (CGT) is charged on the profit you make selling assets (normally excluding your main home). You’ll pay tax on the difference between the original purchase price and the sale price. There’s also an annual tax-free allowance you can use to reduce gains, currently £12,300 per tax year.
CGT is also potentially charged on assets that you give away, although gifts to a married or civil partner are exempt. Here the sale price is counted as the market value at the time of the gift.
The CGT annual allowance is reducing from £12,300 to £6,000 in April 2023 and £3,000 in April 2024 and could mean you have a higher tax bill.
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The reduced threshold means that someone selling a share portfolio with a profit of £15,000 will have a CGT bill of £1,800 next tax year and £2,400 after April 2024, compared with £540 this year, assuming they are a higher-rate taxpayer.
Dividend tax hike
The dividend tax threshold is also changing in April 2023, meaning that you’ll owe tax on any dividend income over £1,000 and £500 from April 2024, whereas the current tax-free threshold is £2,000.
This means someone with dividend income of £3,000 per year will pay £675 dividend tax next tax year compared with £337 this tax year. From April 2024, they will owe an even higher £843 dividend tax on their earnings.
How Bed & ISA process works
The Bed & ISA process allows you to sell shares you own outside an ISA or pension and re-buy them inside your ISA. This could potentially help you save tax, as shares held within an ISA or pension are protected from capital gains tax and dividend tax.
You can invest up to £20,000 per tax year in a stocks and shares ISA, and up to £40,000 per year in a pension each tax year.
Selling shares outside your ISA will potentially trigger a capital gain, but it may be possible to save tax by keeping sales each year below the capital gains tax threshold.
Many investors with a large portfolio use the Bed & ISA rules to make the most of their capital gains tax allowance each year and gradually drip the shares into their ISA.
Capital allowances can’t be carried back so it’s important to make use of the higher capital gains tax allowance before the changes kick in next year.
As well as Bed & ISA, it’s also possible to sell and re-buy investments within a pension, with a process known as Bed and SIPP.
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It’s important to remember that a Bed & ISA transaction is treated as a sale for CGT purposes, meaning that gains, when added to your other gains, could exceed the annual CGT tax-free allowance.
Bed & ISA example
Here’s an example to show how the Bed & ISA rules could save tax.
Paula owns 200 AstraZeneca (LSE:AZN) shares she bought for £7 each, which are now worth an amazing £113 each. Her potential capital gain is £21,200 (£22,600 minus £1,400). She sells 115 shares, crystallising a gain of £12,190 and rebuying them within an ISA before April 2023. Her gain is below the CGT allowance for this tax year, so she has no CGT to pay, assuming she has no gains elsewhere.
The following tax year she sells a further 56 shares and re-buys them within an ISA, crystallising a gain of £5,936 (assuming the share price remains unchanged). Again, her gain is below the reduced CGT allowance for 2023-24 of £6,000, so she has no CCT to pay.
Paula continues to use her CGT allowance each year to transfer shares into her stocks and shares ISA, until they are all protected from tax.
She will still need to declare potential capital gains to the taxman, even if her gains are below the CGT threshold.
Get in early
Some ISA providers, including interactive investor, have a very simple, dedicated Bed & ISA process.
For ii account holders, it’s a three-step process:
- 1) Log into your trading account and choose Bed and ISA from the cash & transfers menu.
- 2) Select your accounts, check your remaining ISA subscription, and choose the investments you want to Bed & ISA.
- 3) Leave the rest to ii. We’ll let you know when the process is complete.
If you have a general trading account with interactive investor, you'll only pay a trading fee on the re-purchase, not the sale.
It’s worth starting the Bed & ISA process as soon as possible, rather than leaving it to the last minute. There is usually a cut-off point for Bed & ISA transactions a week or so before the tax year-end to make sure the sale and purchase goes through in time. And with the tax rules changing in April 2023, this tax year is likely to be busier than ever.
Other tax saving ideas
It’s also possible to save capital gains tax by planning ahead and spreading wealth between you and your partner. By each having your own share portfolio, you can each make use of your own annual CGT and ISA allowances.
If you’re thinking of giving away investments, it’s important to remember that this could trigger a capital gain and use up part or all of your CGT tax-free allowance. It may be possible to give away assets gradually to use up your capital gains tax allowance each year.
If you want to pass wealth on to the next generation, or are considering selling a large share portfolio, then it’s worth speaking to a financial adviser or specialist solicitor who will be able to advise you on your individual circumstances and the best way to save tax.
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