Marriage Tax Allowance: What Is It And How Does It Work?

A ‘Bed and ISA’ is the process of:

1. Selling investments that aren’t held in either an ISA or pension

2. Using the proceeds to buy the same (or different) investments inside a Stocks and Shares ISA

Once the investments are inside the ISA, they’re protected from Capital Gains Tax (CGT) and Income Tax on future investment returns.

If you’re wondering where the weird name comes from… it’s a throwback to an older investing term.

Originally, there was something called ‘Bed and Breakfasting’.

This referred to a strategy where investors would sell shares one day (go to “bed”), then buy the same shares back the next morning (have “breakfast”).

The aim was to realise a capital gain (or loss) while keeping the same investment. But HMRC introduced rules to stop people using this technique purely to reduce their Capital Gains Tax bill.

Bed and ISA is a variation on that idea – and remains perfectly legal.

The main reason is to make more of your investments tax-efficient.
Investments held outside an ISA (or pension) can potentially be subject to:

• Capital Gains Tax when you sell them at a profit
• Tax on dividend income if you receive more than your annual dividend allowance

Investments held inside an ISA are generally protected from both.
The sooner your investments are inside an ISA, the sooner any future growth and income can benefit from these tax advantages.

It can.

When you sell investments as part of a Bed and ISA, the sale is treated just like any other sale for Capital Gains Tax purposes.

A Bed and ISA doesn’t wipe out any gains you’ve already made. Instead, it means any future growth after the investments are inside the ISA can generally be free from Capital Gains Tax.

So, if you’ve made a profit, you may have a capital gain and tax may be due on it.

However, many investors use some or all of their annual Capital Gains Tax allowance when carrying out a Bed and ISA.

If your gain falls within your available allowance (currently £3,000 per year), you may have no Capital Gains Tax to pay.

Carrying out a Bed and ISA regularly, rather than waiting until your gains have become much larger, could help you stay within your annual exempt amount.

No.

HMRC doesn’t allow investments held outside an ISA to be transferred directly into one. So the investments must be sold.
The cash from the sale is then used to buy investments inside the ISA.

Although this sounds like a lot of work, many investment platforms make the process very straightforward. In fact, on many platforms, it can be done with a single instruction.

Yes.

The amount you can move into an ISA each tax year is limited by your annual ISA allowance – currently £20,000 per year for adult Stocks and Shares ISAs, £9,000 per year for Junior ISAs, and £4,000 per year for Lifetime ISAs.

If your investments are worth more than your available allowance, you may need to move them across over several tax years.

No one strategy is ever right for absolutely everybody!

It could make sense for you if:

• You hold investments outside an ISA
• You still have some or all of your annual ISA allowance available
• You plan to keep investing for the long term

If all of your investments are already inside ISAs or pensions, there’s no need to carry out a Bed and ISA.

When is the best time to do it?

Many investors choose to carry out a Bed and ISA towards the end of the tax year so they don’t lose any unused ISA allowance. Others prefer to do it earlier in the tax year so their investments spend longer inside the tax-efficient ISA.

There’s no single right answer.

The important thing is making it part of your regular investment routine rather than leaving investments outside an ISA indefinitely.

• A Bed and ISA moves investments from a taxable investment account into a Stocks and Shares ISA.
• Investments can’t usually be transferred directly into an ISA – they need to be sold first.
• Future investment growth and dividend income inside an ISA are generally free from UK Capital Gains Tax and Income Tax.
• Selling investments as part of a Bed and ISA can trigger Capital Gains Tax, so it’s worth considering your annual CGT allowance.
• Making Bed and ISA part of your annual routine can help more of your investments benefit from ISA tax advantages over time.

Bed and ISA: A process where investments held outside an ISA are sold and the proceeds are used to buy investments inside a Stocks and Shares ISA.

Stocks and Shares ISA: A tax-efficient account where investments can generally grow free from UK Income Tax and Capital Gains Tax.

Capital Gains Tax (CGT): A tax you may have to pay on the profit you make when selling certain investments or assets.

Capital Gains Tax allowance: The amount of capital gains you can usually make each tax year before Capital Gains Tax may apply.

ISA allowance: The maximum amount you’re allowed to pay into ISAs each tax year while benefiting from their tax advantages.