It is not possible to transfer your shares directly into an ISA. However, it is possible to use an ISA account to maximise the profits you can take from your shares. Read on to find out how.
What is possible to do is sell your shares held in your dealing account, and then purchase them again within an ISA account. This process is known as ‘Bed & ISA.’ Although this is not a direct transfer from a share-dealing account to an ISA, it achieves the same aim.
This process is not without risks. Conducting a Bed & ISA transaction means that you expose yourself to price changes, although this works both ways. There may also be capital gains tax paid on any profit you’ve made on selling the shares.
However, these risks are offset by the significant tax benefits that ISAs offer compared to share accounts, in terms of capital gains and payment of dividends. ISAs offer up to £20,000 of tax-free allowances every year, so it is an intelligent investment to maximize this with your shares.
What Is The Bed & ISA Process?
The Bed & ISA process is merely selling the shares in your share account and then repurchasing them within an ISA account. Most share accounts these days are online, so the process is only a few clicks on the mouse, and it’s done.
As for costs, having an ISA incurs similar management costs for buying or selling shares as a standard share-dealing account.
Selling shares from your share-dealing account, and repurchasing them under an ISA account is a sound long-term investment strategy. When the shares are held in an ISA, they are exempt capital gains taxes. Also, you do not have to pay income tax on the dividends you receive from an ISA.
Taxes on dividends have become particularly troublesome over the past few years. Transferring shares into ISA accounts helps investors stay ahead of future government changes to regulations around this area.
Using a Bed & ISA over the long term can boost an investor’s overall net returns. It can be especially beneficial for investors with more extensive portfolios who invest for more extended periods.
Potential Costs of Bed & ISA
The Bed & ISA process means that you have to sell your existing shares, and then repurchase them within the ISA account. When selling your shares and rebuying them, there is a possibility of the price going up or down.
There is also a bid/offer spread, which means that the price you buy back the shares is likely to be more than what you sold them for. A commission charge will be levied on each transaction, so this will increase your costs.
If you’ve made a profit on the shares in your share-dealing account that you sell, then you will have to pay capital gains tax on your earnings. You have an individual allowance of £12,000 before paying capital gains tax.
If your annual profits from the combined sale of shares are higher than £12,000, you will have to pay either a 10% tax (if you are on the basic rate of tax) or 20% (for taxpayers on the higher rate).
There is some risk involved with the Bed & ISA process. The risk of price fluctuations in the market means your shares can lose value in the transition period. Commission, capital gains tax, and the bid/offer spread can all eat into your share value.
However, Bed & ISA offers a fantastic opportunity to take advantage of some significant savings on taxes, which would easily offset the risks. For this reason, Bed & ISAs provide a sound investment strategy for investors over the long term.