"Bed-and-ISA is a well-established practice that many investors employ regularly I would urge them to make the most of it now in case the scope for doing so is reduced after 6 April."
Healthy Investment, the historic mutually owned provider of savings and investments, is urging investors to make the most of this their annual Capital Gains Tax (CGT) allowances as the 5 April deadline for 2020/21 ISA subscriptions looms. Looking ahead to the Budget on 3 March, the Bury-headquartered friendly society warns that the annual CGT allowance could be a “soft target” for a Chancellor seeking to raise revenues without sparking a political backlash.
Capital Gains Tax is incurred when an individual sells an asset for more than they originally paid for it, and is charged as a percentage of the profit. Some assets, including primary residences and assets held in Individual Savings Accounts (ISAs) or pension schemes, are exempt but gains on the sale of units in unit trusts or stocks and shares held in non-ISA general investment accounts are usually subject to CGT.
Tax on modest transactions is often mitigated by the annual allowance for gains that individuals are permitted to crystallise before CGT becomes payable. In the 2020-21 tax year this stands at £12,300 per person.
A popular use for this allowance is to sell assets held in non-ISA investment accounts and immediately re-buy them using an ISA, up to that year’s subscription limit (£20,000 per person in 2020/21). This process, which moves assets out of the scope of CGT without incurring any tax on the transaction, is known in the investment industry as “bed-and-ISA”.
According to Peter Green (pictured), chief executive of Healthy Investment, a reduction in the annual allowance for capital gains, limiting the future scope of bed-and-ISA, would be an easy target for Chancellor of the Exchequer Rishi Sunak in his forthcoming Budget.
He said, “There is strong political pressure on the Chancellor not to endanger the post-Covid economic recovery by increasing taxes on income or expenditure, but he also faces calls from many in his own party to start attempting to ‘balance the books’. Capital Gains Tax is generally seen as a tax on moving money around, rather than on production or consumption, so it could be a soft target.
“In particular, reducing the annual allowance would increase revenues without actually being seen to raise the headline tax rate. Bed-and-ISA is a well-established practice that many investors employ regularly as part of their financial planning strategy – I would urge them to make the most of it now in case the scope for doing so is reduced after 6 April.”
Any reduction in the CGT allowance would probably be presented by the Government as a tax on “fat cats”, Mr Green continued. However, he explained, it would also potentially affect individuals who had inherited ISA portfolios from thrifty parents.
He said, “When anyone other than a spouse or civil partner inherits an ISA, it ceases to be an ISA and becomes subject to CGT and income tax. For many people, who because of the exponential rise in housing costs over the past 20 years have been unable to save as much as earlier generations, bed-and-ISA is simply as way of returning assets to the tax status they enjoyed before being inherited, and maximising families’ security as they plan for their own old age.”
CGT is currently charged at a standard rate of ten per cent on taxable gains that, combined with the vendor’s income that year, take the taxpayer’s total income up to the threshold for payment of higher rate income tax.
Taxable gains that, combined with the taxpayer’s other income, fall above the higher rate threshold suffer tax at a marginal rate of 20 per cent. Higher rates (18 per cent for basic rate and 28 per cent for higher rate taxpayers) apply to the sale of second homes and residential buy-to-let properties.
Individual Savings Accounts (ISAs) enable their holders to invest up to the subscription limit each year in cash, stocks and shares, “innovative finance” assets or a combination of the three. Interest, dividends and investment growth are free of Income Tax or Capital Gains Tax.
Healthy Investment, which was founded in 1835 as The Independent Order of Rechabites, has its origins in the temperance movement that grew up during the Industrial Revolution. Today it provides ethically invested ISAs, Investment Bonds, Junior ISAs, Child Trust Funds and savings plans to more than 110,000 members.