There is growing speculation that Chancellor Rachel Reeves will hike CGT in her first Budget on 30 October, potentially aligning CGT rates with income tax. The potential move has been causing alarm for investors with assets held outside of tax-efficient wrappers.
There is also a very real risk that any new CGT regime could take effect immediately following the Budget, rather than from the start of a new tax year. This scenario has been seen under previous administrations and is a move designed to prevent investors hurriedly crystallising gains before any new rules come into effect.
‘Bed and ISA’ is one tactic investors can take advantage of to get around any changes. It will improve their overall tax position no matter how brutal the hike is, but will still make sense even if no changes come into effect.
The process involves savers selling investments held in a taxable environment and repurchasing them within an ISA, where returns are tax-free.
Investment platform Bestinvest has reported that Bed and ISA instructions are up by a quarter at the firm since Labour came into power in July this year, compared to the same period in 2023.
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Alice Haine, personal finance analyst at Bestinvest, said: “Known as Bed and ISA, it allows savers to sell investments held in a taxable environment and repurchase them within an individual savings account – a move that effectively shields those assets from a potential CGT hike provided they don’t breach their CGT exemption of £3,000. It also serves to protect any future income or gains from tax, making a savers’ investment portfolio more tax-efficient over the short and long term.
“Many investors are already taking action, with the number of Bed and ISA instructions at Bestinvest rising by 25% since Labour secured its landslide victory on 5 July in comparison to the same period in 2023. Look back even further and Bed and ISA instructions are up by almost 90% compared to the same period in 2022, indicating that investors are carefully considering the tax efficiency of their investments.”
To complete a Bed and ISA process in full, investors typically need up to 10 days. However this timescale might be up to four weeks if they need to migrate share certificates to a nominee account to sell them.
But there’s no need to panic about hitting the deadline in time. The urgency purely relates to selling the assets and realising the CGT gain. Provided the gain is crystallised before 30 October, investors can then take their time to complete the Bed and ISA process in full.
Haines explained: “While selling investments held outside a tax wrapper and buying new assets can be done instantaneously, those that want to repurchase the same shares and funds outside of an ISA must adhere to UK rules that require investors to wait 30 days to buy back the same investment. The risk here is that the assets shoot up in price before a repurchase can be completed. Of course, they can also drop in price, though neither move makes investments more tax-efficient for the future if they remain in a taxable account.
“Bed and ISA or Bed and Pension, however, is an exception to that 30-day rule, as the money is being moved into a tax-protected stocks and shares ISA or a Self-Invested Personal Pension (SIPP) – a place where it won’t be subject to CGT or income tax on any future investment returns.
“This is why anyone with substantial capital gains on their existing investments, such as shares and funds, held outside a tax wrapper who has some of this tax year’s ISA allowance left would be wise to carry out a Bed and ISA transaction – or Bed and Pension for those that want to top up their pension instead – before the Budget to beat a possible hike in CGT rates.”
Other tax-saving moves to consider before the Budget include paying into a pension, paying into an ISA or Junior ISA (JISA) and transferring assets to a spouse.
