What is a Bed & ISA?
In a bed & ISA, the investor sells securities outside of the ISA tax wrapper and at the same time buys back those same securities within an ISA account. The proceeds of the sale, once settled, are then subscribed to the ISA account as part of the yearly ISA allowance of £ 20,000.00.
This, of course, means a bed & ISA is only available for stocks and shares ISA accounts.
Bed and Breakfast
Do not confuse a bed & ISA with the concept of a bed & breakfast transaction. The bed & breakfast technique has been defunct since March 1998 when CGT rules were changed. Prior to this date an investor could sell a holding one day and buy it back the next day, creating a CGT event on the sale.
This means they could use up part of their annual CGT allowance and, effectively, reset the book cost of that holding to the current market value. If the price had risen since the original purchase date, they will then suffer less CGT when finally disposing of the asset.
Since March 17th, 1998, the rules were changed so that if the investor bought the same securities back within a 30 day period, the original sale would not count for CGT purposes.
What are the benefits of a Bed & ISA?
A bed & ISA allows the investor to subscribe to an ISA account without having to liquidate any assets to do so. This avoids the investor having to be “out of the market”. Without using this approach, the investor would have to sell the shares on his general investment account, wait for that trade to settle, then subscribe the sale proceeds to his ISA account and then invest those funds. This would leave the investor’s money uninvested for a short period and exposed to market changes during that time.
Capital gains tax
Be aware the sale part of a bed & ISA will constitute a capital gains event. The current capital gains personal allowance is £ 12,000.00. The investor should be mindful of the impact that the sale leg of the bed & ISA will have upon his tax position.
Note, this can be used to your advantage, as you may create a capital gains loss, and if the gain does not take the investor over their personal capital gains allowance, then they can rest easy that any future gains on the asset are now insulated from taxation, as it is held in the ISA wrapper.
What is not a Bed & ISA
To qualify as a Bed & ISA, the investor must buy back exactly the same securities that were sold outside of ISA wrapper. If an investor sells one stock outside of the ISA and buys another stock within the ISA account, this will not count as a Bed & ISA.
Fees
Fees will vary from provider to provider, but often there will be one charge to perform a bed & ISA rather than 2 separate commission costs for booking both the buy and sell trades.
Note, the purchase trade will incur a 0.5% stamp duty charge.
Refer to your provider for their fees, and as they will vary, it will be worth shopping around.