April was a record month for bed and ISA transactions at AJ Bell, with the total number up 74% on the same period last year as investors rushed to move assets into tax wrappers ahead of further increases to capital gains and dividend taxes.
The spike follows years of fiscal pressure on investors holding assets outside ISAs or pensions. Rishi Sunak's and chancellor Jeremy Hunt's conservative government cut the capital gains tax allowance from £12,300 to £3,000 between April 2023 and April 2024 and reduced the dividend allowance from £2,000 a year to £500 over the same period.
In October 2024, the current Labour government raised the capital gains tax rate on shares from 10% to 18% for basic-rate taxpayers and from 20% to 24% for higher and additional-rate taxpayers. Dividend tax rates for basic and higher-rate taxpayers rose by two percentage points in April this year.
Frozen income tax thresholds were another driver. Pay rises have pushed more people into higher tax brackets, which automatically increases the rate of capital gains and dividend tax owed on investments held outside a tax wrapper.
Sarah Coles, head of personal finance at AJ Bell, described these as "ferocious tax attacks", which, combined with market volatility, have increased the popularity of the bed and ISA instrument.
In fact, April is typically the busiest month for bed and ISA activity – the peak day this tax year was 9 April, after the Easter break – but Coles said some investors had used the market turbulence at the start of the tax year to their advantage.
When the value of an investment falls, less of the gain is subject to capital gains tax when it is sold, which means investors can move more of it within the ISA wrapper before hitting their annual allowance.
What is a bed and ISA?
A bed and ISA involves selling investments held in a general investment account and immediately buying them back inside a stocks and shares ISA.
The purpose is to crystallise a gain under the current capital gains tax allowance – £3,000 for this tax year – while simultaneously moving the investment into a wrapper where future growth and income are sheltered from both capital gains and dividend tax.
HMRC rules state that if the same investment is bought back within 30 days, the disposal is not recognised for tax purposes, meaning the original acquisition cost is used when the asset is eventually sold.
Points to consider
The sale triggers a capital gains event, so investors should check their remaining annual allowance before acting. It can make sense to prioritise assets where the gain will not exceed the £3,000 threshold.
Loss-making investments can also be moved, as those losses can be offset against gains elsewhere in the same tax year.
Where a portfolio contains both growth and income assets outside an ISA, Coles suggested moving income-producing holdings first. Dividend tax rates are higher than those on capital gains and investors have less control over when income arrives than they do over when they choose to sell.
The annual ISA allowance is £20,000. Bed and ISA transactions count toward that limit, so investors need to check how much of the allowance remains. One dealing charge applies but stamp duty on most UK-listed shares and foreign exchange charges on international holdings will still be due on the repurchase.
Finally, only exchange-traded assets are eligible. That covers UK-listed and most internationally listed shares, investment trusts, ETFs and bonds but not OEICs or unit trusts.