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The tax trick more investors are taking advantage of to avoid capital gains

21 February 2023

Investors are using the ‘bed and ISA’ option as the tax year-end approaches.

By Jonathan Jones,

Editor, Trustnet

Forcing people to pay more tax on their hard-earned savings is not a popular policy for governments but it is something that UK investors face in the upcoming financial year after chancellor Jeremy Hunt confirmed a reduction to the capital gains allowance from April.

For investors, the most obvious effect on their savings is that any investment held outside an ISA or pension will be subject to capital gains tax (CGT).

Currently, any capital gains over £12,300 on top of annual income is taxable. If on the basic-rate tax band, this is at 10%, while higher-rate payers are taxed at 20%.

From the new tax year, the amount that can be earned before CGT is enforced will be slashed from £12,300 to £6,000, while from April 2024 this will halve again to just £3,000. This has created a need for investors to put as much of their savings into tax wrappers as possible.

It means that a taxable gain of £12,000 will attract no tax this year, but next year a saver would pay £600 or £1,200 to the taxman, depending on their tax band. By April 2024 a gain of £12,000 will attract CGT of either £900 or £1,800.

Similarly, from April the amount that can bed earned before paying dividend tax is also being cut, from £2,000 a year to £1,000.

The combination of these two tax hikes means that owning assets outside of tax wrappers is getting more expensive. One option available to investors is the oft-overlooked ‘bed and ISA’, which is when any savings held in a general investment account are transferred over to an ISA.

Data from fund shop interactive investor shows more people are using this than ever before. In January 2023, bed & ISA applications were up 122% on the same month the previous year, while in December and November these applications were up 90% and 72% respectively.

Myron Jobson, senior personal finance analyst at interactive investor, said the “bitter cocktail of tax freezes and some reduced allowances” means that although headline tax has not been raised, more will pay higher taxes in the coming years.

“Shifting investments into an ISA protects future gains and dividends from the clutches of tax. It also means that you will no longer have to declare them on your self-assessment tax return. Bed & ISA is also a valuable tool as a part of a broader portfolio spring clean strategy,” he said.

“There might be CGT implications, depending on your circumstances as bed & ISA action is treated as a sale for CGT purposes. This means that gains that exceed the current annual CGT allowance is liable to tax.”

Laura Suter, head of personal finance at AJ Bell, said: “You need to check you’ve got some of your £20,000 ISA allowance left and then use your investment platform’s bed & ISA service, which means the investment outside of the ISA is sold, the proceeds moved into an ISA and used immediately to purchase the same investment within the ISA.”

“Just make sure that you state that you only want to sell enough to realise £12,300 of gains this tax year.”

Alice Guy, personal finance editor at interactive investor, added that investors who wish to gift assets to someone else will also need to pay capital gains – something that many forget about.

“If you’re planning to gift assets to someone else, then it could be worth making use of your annual CGT allowance this year before it’s reduced,” she said.

“Many people don’t realise that you also owe capital gains tax on assets gifted to someone else. The gain is based on the market value at the time of the gift. But tax planning decisions are complicated and it’s important not to let the tax tail wag the financial planning dog.”

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