Could ‘Bed & ISA’ spare you a hefty tax bill?

You often hear inflation compared to weight gain. You don’t notice a thing when it starts, but slowly and surely it creeps up on you; often you only pick up on it when you look back at old photos or find your clothes no longer fit. But that analogy is becoming increasingly suited to capital gains tax (CGT) too. You might not think of it as a problem now, but as the years pass, a CGT liability can balloon and land you with a hefty tax bill when you eventually come to sell an investment.

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

However, just as keeping an eye on your diet can help you keep your weight in check, regular reviews of your investments – combined with a bit of forward planning – can alert you to a potential liability and protect you from a surprise tax bill.

I thought CGT was only a problem for the rich?

CGT is no longer something just wealthy people need to worry about. Swingeing reductions to the annual exempt amount (from £12,300 in 2022-23 to just £3,000 today) mean it’s much easier to fall into the CGT trap. Even those investing moderate sums of money over the years can rack up a bill if their investment performs well.

Take an investor who paid a £10,000 lump sum in toa trading account 10 years ago. Their investment achieved average returns of 5% a year and after a decade it’s worth £16,470.

That gives our investor a gain of £6,470 – but only £3,000 is covered by the annual CGT allowance, leaving a further a £3,470 that will be subject to tax.

If our investor remains in the basic-rate tax bracket after the gain is added to their income, they would be taxed at a rate of 18%, creating a bill of £624.60 when they sell their investment.

However, if our investor falls into the higher-rate tax band, they will be taxed at 24%, landing them with an £832.80 bill.

Note that these tax rates increased at the end of October last year as part of Autumn 2024 Budget. The rate hikes were implemented immediately, rather than being delayed until the start of the new tax year in April.

How to keep CGT in check

The easiest way to protect your investments from tax is to hold as much wealth as possible in a tax wrapper, such as a stocks and shares ISA or a SIPP, where all gains will be free of CGT (and dividend tax too).

That’s good to know when you have got new money to invest, but what about money that’s already invested in a trading account where it’s exposed to tax?

With a bit of planning, it’s still possible to move money out of trading accounts (also known as general investment accounts) and into an individual savings account (ISA) where it will be sheltered from tax.

This can be achieved by completing what is referred to as a ‘Bed & ISA’. Rachael Griffin, a personal tax expert at Quilter Cheviot, explains: “A Bed & ISA is a process where you sell investments held outside an ISA and then repurchase them within an ISA. The ISA allows you to shelter future gains and income from capital gains tax (CGT) and income tax. Essentially, it involves ‘bedding’ your investments into the tax-efficient ISA wrapper.”

• 17 ways to cut your tax bill
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

This can help you avoid falling foul of 30-day share matching rules, which prevent you from selling shares to use your annual CGT allowance before buying the same shares back shortly after.

Griffin adds: “To repurchase an investment that you have recently sold, over 30 days must elapse between the two transactions to realise the full gain. Repurchases within 30 days will be ‘matched’ with sells, limiting the gain or loss realised by the original transaction. This might mean you fail to utilise your CGT exemption, or create a loss that you can offset against other gains. By contrast, the share matching rules do not apply to shares repurchased within your ISA.”

Each year you can pay up to £20,000 into an ISA and the allowance has been frozen at that level until 2030. You just need to make sure that you don’t sell so much that you trigger a CGT bill.

Alternatively, if you have used up your ISA allowance for the year already, you could also use the same process to pay into somebody else’s ISA. You could pay into your spouse’s ISA, for example, or a Junior ISA if you have children or grandchildren (just bear in mind that the JISA allowance is lower, at £9,000 a year).

Once you have paid money into someone else’s ISA, that money is legally no longer yours, but if you are happy to boost the family finances, it could still be a tax-effective use of your wealth.

How to complete a Bed & ISA

The first step is to think about how much you need to transfer from your trading account into your ISA, bearing in mind that if you sell enough to trigger CGT, you may inadvertently land yourself with a tax bill – the very thing you are trying to avoid.

Griffin says: “To avoid triggering a gain, you need to consider your annual CGT allowance, which is currently £3,000 for the 2024-25 tax year. Calculate the gain on your investments by subtracting the original purchase price from the current market value, less any costs. Also, check if you have the full £3,000 allowance available.”

If it looks like you are going to breach your annual exemption, you can avoid triggering a taxable gain by moving money over in tranches, straddling more than one tax year. For example, at the end of March before the end of the tax year and then again from 6 April once the new tax year has begun and you’ve got a fresh allowance.

To complete a Bed & ISA, you’ll need to have a trading account and a stocks and shares ISA on the same platform. Then it’s simply a case of instructing your platform to complete the process.

You can carry out the transaction yourself, but it’s usually more cost-effective to ask your platform to do it as most will only charge you a fee once: for the investment purchase and not the sale. The transaction should also be quicker, meaning you’ve got less time out of the market.

A Bed & ISA can usually be completed in a few days, but it’s worth noting that it can take longer towards the end of the tax year when platforms can get particularly busy.

Make CGT planning a habit

To really keep CGT at bay, it’s important to make tax planning a habit. For any investments that aren’t under the umbrella of an ISA or pension, it’s worth thinking about realising gains up to the value of the allowance each year. That way you get to take advantage of the annual exempt amount each year, not just in the year you sell.

• How the great wealth transfer could accelerate in 2025
• How will the Autumn Budget affect tax year end 2025?

A Bed & ISA is a great option if you have allowance remaining as it means your money is sheltered from tax in the future. But even if you don’t, you can still sell investments to realise a gain and choose alternative holdings – so you stay on the right side of the 30- day rule.

Griffin adds: “Considering CGT annually allows you to make the most of your annual CGT allowance, which cannot be carried forward to future years. By planning ahead you can manage your gains more effectively, potentially reducing your overall tax liability. This proactive approach helps in avoiding large, unexpected tax bills when you eventually decide to sell your investments.”