Bed and ISA means selling investments you hold outside an ISA and buying them back inside a stocks and shares ISA. It doesn’t change what you own, only the wrapper it’s held in: once the investments are inside the ISA, their income and growth are no longer taxed.
Why it’s worth doing
Outside an ISA, investment income and gains are taxable once they go over the yearly allowances:
- Gains: only the first £3,000 a year is tax-free (the annual exempt amount). Above that, gains are taxed at 18% within the basic rate band and 24% above it.
- Dividends: only the first £500 is tax-free; above that, dividends are taxed at 10.75%, 35.75% or 39.35% depending on your tax band.
Inside an ISA, neither is taxed, and you don’t report them on a tax return. The sooner investments are inside an ISA, the more of their future growth escapes tax.
The tax on the sale
Selling the investments outside the ISA is a disposal for Capital Gains Tax, so any gain on them counts towards your gains for the tax year. One approach is to move holdings in stages, keeping each year’s gains within the £3,000 allowance.
Example. You hold funds worth £15,000 that cost you £11,000, so the gain is £4,000. You have no other gains this year.
- Moving the whole holding in one go leaves £1,000 of taxable gain: £180 of tax at 18%, or £240 at 24%.
- Moving three-quarters of it this year (a gain of £3,000) and the rest next year keeps each year’s gain within the allowance, so there’s no tax, as long as the allowance is the same next year and you have no other gains.
If the investments are worth less than you paid, the sale gives you a loss, which you can use against other gains if you report it to HMRC.
Why the 30-day rule doesn’t apply
When you sell shares and buy the same shares back within 30 days, HMRC normally matches the sale with the new purchase (the “bed and breakfasting” rule), which stops you resetting your gain simply by selling and rebuying. Bed and ISA isn’t caught by this. The ISA Regulations apply the matching rules to investments held in an ISA separately, as if you held them in a different capacity from your other investments, so buying them back inside the ISA isn’t matched with the sale outside it.
The ISA allowance
The money you pay into the ISA to buy the investments back is a new payment in, so it uses your ISA allowance: up to £20,000 a tax year across all your ISAs (the ISA allowance). A large holding may take several years to move for this reason as well as for the tax on the gains.
You can’t transfer investments you already hold outside an ISA directly into an ISA (except shares from certain employee share schemes): they have to be sold and bought back, which is what Bed and ISA does.
Costs
Some investment platforms offer a Bed and ISA service that sells and rebuys on the same day, which keeps the time you’re out of the market short. Check what it costs: dealing charges on the sale and the purchase, the difference between buying and selling prices, and any other platform fees. On small holdings, the costs can outweigh the tax saved.
Step by step
- Work out the gain on each holding you might move: what it’s worth now minus what you paid (for shares bought at different times, use the average cost of your holding).
- Add up your other gains for the tax year, so you know how much of the £3,000 allowance is left.
- Choose how much to move this year, within that allowance and your ISA allowance.
- Use your platform’s Bed and ISA service, or sell and rebuy yourself inside the ISA.
- Keep records of the sale proceeds, the cost and the gain. If your gains are above the allowance you’ll need to report and pay the tax; if you’re in Self Assessment, you also report gains when the total you sold assets for is more than £50,000.
Related guides
- Capital Gains Tax: rates, allowances and reporting
- Stocks and shares ISAs: opening one and choosing investments
- ISA allowance: how much you can pay into ISAs each year
- ISAs guide: the ISA types and the main choices in one place