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“Bed and Isa” requests rose by more than 50 per cent in 2023, as UK savers sought to limit the impact of cuts to capital gains and dividend tax allowances.
Requests to transfer into an Isa those assets that are unprotected from tax rose by 53 per cent compared with the previous year, according to investment platform Interactive Investor.
Bed and Isa involves selling unprotected assets such as stocks, funds and investment trusts and then buying the same assets within an Isa, which allows capital gains and dividends to be sheltered from tax.
The capital gains allowance is set to halve to £3,000 from April, while the dividend tax allowance will also halve to £500. Both had already been halved at the start of the 2023 tax year, from £12,300 and £2,000 respectively.
According to Interactive Investor, requests were up 60 per cent in “Isa season” last year, covering February to the start of April, and 7 per cent year on year in January.
“People are clued up and rushing to shelter their money from taxes on their gains,” said Myron Jobson, a senior personal finance analyst at Interactive Investor.
However, the Bed and Isa tactic may not be appropriate for every investor. Trading fees typically apply on the repurchase — but not the sales — of assets, as well as stamp duty and market spread costs. Capital gains tax may also be payable above the personal allowance.
If gains are taxed on selling assets to enter an Isa, why do it? Experts say the attractions accrue in the long term.
“People have to be aware that it really does depend on the size of your portfolio,” said Jobson. “It depends how many assets you’re selling and buying and the value of the investment gain you can achieve, but the idea is that over time your investments go up and any fees you might pay will be outweighed by the returns you’ll make.”
As changing tax allowances attract the attention of savers and investors, parents are also being urged to protect their children’s savings. If a child earns more than £100 in interest on savings gifted by a parent, the money can be taxed as if it is the parent’s.
This means that a nest egg of just £1,900 would qualify, based on a 5.25 per cent rate offered by the top easy-access children’s account. But one-fifth of parents believe the interest received on a child’s savings is tax free, according to investment platform AJ Bell.
“It’s one of the little-known quirks in the tax system, and until recently it hadn’t been a huge problem because interest rates have been so low,” said AJ Bell’s head of personal finance Laura Suter.
Parents can pay £9,000 into a Junior Isa every year. However, the highest rates on easy-access cash Jisas are lower than non-Isa accounts. Based on how much they want to save and their income tax rate, parents must decide if it is worth taking a higher rate and a potential tax bill, or a lower rate that is free of tax.
“We’re still expecting interest rates to be higher for longer, so it’s going to be a problem if parents build up more and more savings in these accounts that are exposed to tax,” said Suter.
