Bed & ISAs mean ‘more than ever’ now to beat April tax changes

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With just five weeks to go before the new financial year begins on April 6, an expert warns that time is running out to make the most of the current, more lenient tax allowances. Investors can use a Bed and ISA to help protect finances and reduce the higher income tax liability.

Alice Haine, personal finance analyst at Bestinvest, said: “Time is ticking and with just five weeks until the end of the financial year at midnight on April 5 – Britons are starting to realise that the end of this tax year could be one of the most important yet.”

The thresholds for the basic 20 percent and higher 40 percent rates of income tax are set to be frozen until 2028 at £12,570 and £50,271 respectively, and the highest 45 percent income tax band will reduce from £150,000 to £125,140.

This means more people will either be pulled into the tax system for the first time ever or into higher tax bands as nominal wages increase.

Ms Haine said: “Add in the fact that the annual capital gains tax (CGT) exemption will halve from April 6 (from £12,300 to £6,000) and halve again in April 2024 to £3,000. The annual tax-free dividend allowance will [also] halve to £1,000 from £2,000 from April 6, and then reduce again to a mere £500 in 2024 – and it’s clear your investments might need more tax-efficient storage space before allowances dwindle.”

With a record 6.1 million expected to pay income tax at the higher rate of 40 percent or the additional rate of 45 percent this tax year, focusing on longer-term savings as well as the everyday bills will become imperative for those looking to reduce the income tax hit.

According to Ms Haine, this figure is likely to jump again next financial year as “bumper pay rises” push people’s salaries into higher tax thresholds, which is why taking advantage of tax-free allowances on Individual Savings Accounts (ISAs) and pension contributions is now imperative.

Ms Haine said: “While maximising tax allowances offered by ISAs and pensions can be a great way to reduce an income tax liability, not everyone has pots of cash sitting around ready to transfer in. This is where the Bed and ISA might come into play.”

Why Bed and ISA protects finances from higher tax burdens

For those who hold investments such as shares, funds, investment trusts or exchange-traded funds outside a tax wrapper, such as in a General Investment Account or an employee share plan, it might make sense to transfer them into an ISA account ahead of the tax changes.

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Ms Haine said: “This can be the case for those who have inherited a lump sum or have built up investments elsewhere, perhaps because their ISA was being used to store savings for a house deposit.

“Savers can shelter up to £20,000 this tax year in an ISA with any income or capital gains tax-free, allowing them to grow wealth and withdraw investments when they want without fear of a hefty tax bill at the end.”

However, Ms Haine notes, to “get ahead” of tax allowance cuts, which will see investors facing capital gains at much lower levels of profit and income, investors can sell shares or funds and repurchase them with an ISA. This process is known as ‘Bed and ISA’ and helps keep future returns “out of the reach” of tax charges.

Ms Haine said: “It’s a sensible move when you consider CGT – which is charged on the profit you make on your investments, is charged at 10 percent for basic rate taxpayers or 18 percent for higher and additional taxpayers.

“For that reason, anyone who may have made substantial capital gains on their investments outside tax wrappers should consider selling up now while they still have the £12,300 tax-free allowance to utilise.”

Those who hold investments jointly with a spouse have £24,600 to use up this tax year – as opposed to the £12,000 in total from April 6.

Similarly, those with dividend-paying assets held outside an ISA might also risk breaching their dividend allowance limit when it halves next year.

Ms Haine said: “Dividend tax on the income investors receive from shares, funds or investment trusts is charged at 8.75 percent for basic rate taxpayers, 33.75 percent for higher rate taxpayers and 39.35 percent for additional rate taxpayers.

“The alternative of holding investments in an ISA lets your money compound and grow without the risk of taxation.”

Four step guide to Bed and ISA

Those who don’t have new money to invest to fill up their annual £20,000 ISA allowance, but do hold other investments and are interested in the benefits of a Bed and ISA can look into the following steps to open one.

Step 1: Open an ISA or top up an existing account

According to Ms Haine, people should first set up a stocks and shares ISA. This can either be with the same provider as their general investment account or with a different provider.

She added: “Remember, while you can have more than one type of ISA, you can only contribute to one stocks and shares ISA per tax year.”

Step 2: Check ISA allowance

Those who already have an ISA in place and have already made contributions into this tax year – as well as to a Cash ISA – should calculate how much of their £20,000 they have left.

Ms Haine said: “Go over that figure and you will need to let HMRC know on the ISA helpline on 0300 200 3300 and they will advise on the best steps to rectify the situation.”

Step 3: Sell investments, taking care not to breach CGT allowance

People then sell their existing investments held in an investment account up to the value they would like to move into their ISA, making sure they do not exceed their CGT limit of £12,600 in the process.

Ms Haine said: “While you may pay CGT on any profits above your annual allowance, moving the money into an ISA or SIPP means you won’t have to in the future – something that will become very beneficial as allowances dwindle.”

Step 4: Move the money or reinvest

If a person is moving their investments to an ISA with the same provider, the sale and purchase can be done simultaneously.

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Ms Haine said: “Remember, your provider may charge a trading fee as well as stamp duty (applicable to UK shares) so take note of those before you proceed. There will almost always be a buy/sell spread between the sale and purchase price, so you could end up with slightly fewer shares in your ISA than you held previously.”

She continued: “If you are moving to another provider, wait for the funds to appear in your investment account as cash then call the new provider and make the transfer to the ISA you hold with them. There is a chance of more price movement between trades in this instance.

“Once the funds are added to the ISA, you can then buy back the same investments – effectively ending the Bed and ISA journey. However, savers can also hold the money in cash or invest in a fresh collection of assets.”

However, before making any significant financial decisions and are unsure, Ms Haine noted: “It might be wise to speak to a financial coach for guidance on the next steps.”

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