This article is part of the special series, Investing with ISAs Week.
Morningstar's 'Perspectives' series features guest contributions from third parties such as asset managers, academics and investment professionals. The below article was written by Alexander Riley, an IFA and director at Bunker Riley Independent Financial Planning.
It is commonly known that stocks and shares Individual Savings Accounts (ISAs) offer individual investors tax-privileged investment opportunities, yet most investors assume that ISAs must be funded from current savings, which just might not be an option right now. It is not as commonly known that ISAs can also be funded from existing investments, which allows investors to fully utilise their ISA allowance without committing their savings.
At a time of stock market and economic uncertainty, it is understandable that investors feel hesitant or unwilling to commit to their ISA allowance. However, these same investors may already hold significant assets in stocks and shares or via investment funds outside of an ISA wrapper. By selling enough of an existing investment and buying it back immediately within an ISA wrapper, an investor is able to transfer an existing asset from a taxable environment to a tax-privileged environment without committing any new money. This is commonly referred to as ‘Bed & ISA’ and it provides a little beneficial tax planning and house keeping in lieu of investing further funds.
As an example, a husband and wife with £40,000 already committed to the stock market via unit trusts, which are capital gains and income taxable, could Bed & ISA £11,280 each to the end of the current tax year and then Bed & ISA the rest of the money in the new tax year starting April 6. This assumes that no ISA allowances have already been used. The end result would facilitate a transfer of the fully taxable £40,000 investment to ISAs within a few weeks and any future income and capital gains would incur tax-privileged status.
There are a couple of caveats to be aware of. First, selling an existing investment and buying it back is still deemed a disposal for Capital Gains Tax (CGT) purposes and the investor must be careful not to trigger a significant CGT liability. For most investors the availability of the individual £10,600 CGT annual exemption for the current year will be useful in offsetting any capital gain but it is important to check as individual circumstances will differ. Second, there will be costs involved when transferring to an ISA, whether it is the dealing costs and stamp duty of selling and buying shares or the switch cost or initial charge when dealing with funds.
On the whole though, the Bed & ISA transaction is great housekeeping for those with existing investments who are unwilling or unable to invest further. A liability to tax and the transaction costs must be considered but future tax-free capital gains and tax-privileged income could far outweigh any transaction costs.
The original version of this article was published February 2011.
