What is Bed and ISA and how does it work?

What is Bed and ISA?

The Bed and ISA strategy is where you sell existing investments typically held in a GIA (General Investment Account) and rebuy them in an ISA (Individual Savings Account) in order to benefit from the tax-advantaged wrapper without materially changing your investments.

At IG, our General Investment Account is named a ‘Share Dealing Account.’

The term originates from an old financial practice called ‘Bed and Breakfasting,’ where brokers would sell your shares overnight and buy them back the next day, or in the parlance, ‘put your shares to bed overnight and then wake them up.’

This establishes a new cost basis for Capital Gains Tax purposes and was often done to keep gains within the tax-free allowance. When ISAs were introduced in 1999, the term evolved to Bed and ISA.

How does Bed and ISA work?

Bed and ISA allows you to sell investments held outside an ISA and repurchase them inside an ISA. The goal is to take advantage of the tax benefits offered by ISAs, including zero tax on capital gains, dividends and interest. This is one of the most tax-efficient ways to invest.

HMRC does not allow shares to be moved directly from a GIA to an ISA, so they must first be sold with the proceeds then transferred into a Stocks & Shares ISA before the same shares are repurchased.

Normally, this process takes between 48 and 72 hours, during which time the value of the shares can fluctuate, meaning you could end up with more or fewer shares than when you sold. To minimise this effect, our Bed and ISA service allows you to quickly repurchase shares, ensuring any future gains are protected from tax by the ISA wrapper.

However, it’s important to note that Bed and ISA requests can only be made for UK stocks, with any profit from the initial sale subject to Capital Gains Tax subject to the annual allowance. Further, shares rebought in your ISA count towards the annual £20,000.00 investment limit.

How to get started

If you want to ‘Bed and ISA’ your account with us:

1. Email your instruction to helpdesk.uk@ig.com
2. Include the account number of your GIA and your ISA
3. Include the name of the stock(s) and the number of shares you wish to transfer
4. Explain how you want to cover the cost

After we have confirmed your email, we will sell your investments on the open market, move the proceeds into your ISA, and then buy the same shares in the ISA. You can only buy back the same shares you plan to sell.

We will charge £40 on the sale of shares per line of stock, but you won’t incur any cost from us on the repurchase. There may be a PTM (Panel on Takeovers and Mergers) levy of £1 to pay on both sides of the trade, depending on the share and the consideration of the trade. You may also need to pay stamp duty of 0.5% of the notional value on the repurchase within your ISA.

While the Bed and ISA process is relatively fast, when selling and rebuying shares there is always a risk of price movement while you’re out of the market. Further, many shares have a lower price to sell (ask) than the price to buy (bid).

This can result in buying back fewer (or rarely, more) shares than you originally held. By using the 'Bed and ISA' process with us, this risk is capped at either £30.00 or £50.00 spread per line of stock.

Learn how to manage your risk.

To cover the cost of a Bed and ISA, you can either fund your account or agree for a number of the shares to be sold and the proceeds used. Always remember that tax rules are not fixed and can change in the future.

Why carry out a Bed and ISA?

Some of the most common reasons to conduct a Bed and ISA with us include:

• Tax Efficiency — Capital Gains Tax is due on profits from selling investments outside an ISA if the profit exceeds the annual CGT allowance. Investments within an ISA are free from CGT

• Dividends and Interest — dividends and interest earned on investments within an ISA are not subject to dividend or income tax

• Easier Tax Reporting — there is no need to report ISA investments to HMRC, which simplifies your tax returns

• Easy Transfer — we take care of all the hassle. You can start the process with one email

• Fair Fees — we offer competitive and transparent pricing on all shares

Tax implications of Bed and ISA

There are several tax implications to consider when conducting a Bed and ISA, including tax planning opportunities:

• When you sell investments to fund your ISA, you may need to pay Capital Gains Tax if the gain exceeds the annual CGT allowance. For the tax year 2024/2025, the allowance is £3,000.00, but this allowance has been cut in recent tax years

• You may wish to only sell enough shares to realise a capital gain below the annual allowance, especially if you are close to a new tax year when it refreshes. You will need to balance generating a taxable gain against the benefits of moving your investment into the ISA tax wrapper

• The annual ISA contribution limit is £20,000 and this is the maximum you can transfer. It may make sense to transfer your higher risk shares to your ISA as this could increase the potential tax saving

• Every time you contribute to your Stocks & Shares ISA, the amount is deducted from your £20,000.00 allowance, which leaves less room for new investments

• Investments held outside of an ISA are generally subject to tax. The annual dividend allowance is £500.00, with anything above this taxed at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The annual capital gains allowance is £3,000.00, with anything above this taxed at 10% for basic rate taxpayers and 20% for higher rate taxpayers (on shares)

• Other than our fees, you might incur the 0.5% stamp duty charge on the repurchase of UK shares within your ISA

• There may be a PTM (Panel on Takeovers and Mergers) levy of £1.00 to pay on both sides of the trade, depending on the share and the consideration of the trade

• The spread between the bid and the ask (the difference between what you can sell and buy shares for) is generally small but can be significant with illiquid small cap stocks.

• Usually the sale and repurchase of shares will happen in the same day. However, many funds only transact once per day, which can mean you might miss out on entitlements which depend on holding the equity at market close, including dividends or voting rights. We may also not be able to buy back shares if the stock is suspended. It is your responsibility to consider these risks

• Tax rules are not set in stone and changes to Capital Gains Tax, dividend tax and ISAs are all possible in the near future

Bed and ISA summed up

• The Bed and ISA strategy is where you sell existing investments typically held in a GIA (General Investment Account) and rebuy them in an ISA (Individual Savings Account)

• Capital Gains Tax and dividend tax is due on profits from selling investments outside an ISA if the profit exceeds the annual allowances. Investments within an ISA are free from both taxes

• You can start a Bed and ISA with us by emailing helpdesk.uk@ig.com

• There are several tax implications when conducting a Bed and ISA which you should consider before moving your investments