If you’ve built up investments outside of an ISA, you might be missing out on valuable tax advantages. A strategy known as ‘bed and ISA’ can help you move these investments into a tax-efficient ISA wrapper. This guide explains how it works, when it might be beneficial, and the key considerations to keep in mind.

What is a ‘bed and ISA’?

‘Bed and ISA’ is a process where you sell existing investments held outside an ISA and reinvest the proceeds into an ISA. The goal is to allow your future returns to grow free of income tax and capital gains tax (CGT). ISAs shelter investments from capital gains tax (CGT) and dividend income tax. The name originates from the historical practice of selling shares at the end of one trading day (putting them “to bed”) and buying them back the next day, now within an ISA.

How does it work?

1. Sell your investments: Identify the investments you want to move into an ISA and sell them.
2. Reinvest within your ISA allowance: Use the proceeds to purchase investments within an ISA. For 2024/25, the ISA allowance is £20,000.
3. Tax-efficient growth: Once inside the ISA, your investments can grow free from income tax and CGT.

When might it benefit you?

‘Bed and ISA’ can be particularly useful if:

• • You’ve reached or expect to exceed the CGT annual exemption limit: By selling investments and reinvesting within an ISA, you avoid paying CGT on future gains.
  • You want to simplify tax reporting: ISAs eliminate the need to declare gains or income on your tax return.
  • You’re building long-term tax efficiency: Moving investments gradually each year can make your portfolio more tax-efficient over time.

What are the potential costs and considerations?

1. Capital gains tax (CGT): Selling investments may trigger CGT if your gains exceed the annual exemption £3,000 for 2024/25). Consider spreading sales over multiple tax years to stay within the exemption.
2. Transaction costs: Both selling and repurchasing investments may incur brokerage fees or stamp duty.
3. Market movement risks: There may be a gap between selling and rebuying, during which market fluctuations could affect your investment value. 

Case study: Tom’s tax-efficient investment strategy

Tom, a 45-year-old investor, holds £50,000 in shares outside of an ISA. He wants to move his portfolio into an ISA for tax efficiency but doesn’t want to incur a large CGT bill. Here’s how he approaches it:

1. Tom sells £20,000 worth of shares, realising a gain of£2,000, which is below the CGT exemption limit for the year.
2. He reinvests the £20,000 into a stocks and shares ISA, ensuring future growth and income from these investments are tax-free.
3. The following tax year, Tom repeats the process, gradually moving his portfolio into the ISA.

This approach helps Tom make the most of his ISA allowance while avoiding unnecessary tax charges.

Speak to your adviser

‘Bed and ISA’ can be a powerful strategy for making your investments more tax-efficient, but it’s essential to consider the costs, timing, and your overall financial goals. Speak to your financial adviser to explore how this approach could work for you and ensure it aligns with your wider investment strategy.

Important information:

The value of investments can go down as well as up, and you may not get back the full amount you invested. Past performance is not a guide to future performance, and past performance may not necessarily be repeated. Tax benefits depend on personal circumstances and current tax rules, which could change in the future. Information provided is for guidance only and does not constitute financial advice. Tavistock Investments Plc is authorised and regulated by the Financial Conduct Authority.