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 such as today, it is understandable that investors feel hesitant or unwilling to commit to their 2009/2010 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 £34,800 already committed to the stock market via unit trusts, which are capital gains and income taxable, could Bed & ISA £7,200 each (£10,200 for the over 50s) prior to the end of the current tax year and then Bed & ISA a further £10,200 each (the new ISA limit for all) in the new tax year starting April 6th. This assumes that no ISA allowances have already been used. The end result would facilitate a transfer of the fully taxable £34,800 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 £10,100 CGT annual exemption 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 but 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.
Alexandre Riley DipPFS is Director at Medical & General Independent Financial Advisers.
Medical & General is currently offering Morningstar.co.uk readers commission or fee reductions on ISA investments during the period ending April 5th 2010. For more information and for full details Alex can be contacted on 020 7569 6780 or at alex.riley@medicalgeneral.com.
