Investors worried about potential increases to capital gains taxes are selling their investments ahead of the Budget – and buying them again with ISAs or self-invested personal pension (SIPP) in efforts to make future returns tax-free.
Experts say they usually see an increased use of the technique – known as “bed and ISA” – around the end of the tax year and ahead of major fiscal events, like the Budget.
But they say this has become more pronounced in recent years, because of speculation that capital gains tax (CGT) – a tax paid on gains on shares and other assets – could increase.
Investment platforms are seeing the trend repeat itself, amid speculation Chancellor John Healey is planning a CGT raid on October 28.
Although “bed and ISA” can be a valid tax-planning strategy, financial advisers say people shouldn’t make panicked decisions based on what could potentially happen at Budget.
How does ‘bed and ISA’ work?
Generally speaking, if you sell shares or other assets held in general investment accounts for more than you bought them for, you “realise a gain” and may owe CGT.
Above the £3,000 CGT tax-free allowance, basic-rate taxpayers pay 18 per cent on share gains, while higher and additional-rate taxpayers pay 24 per cent.
The exception to this is if investments are held in an ISA. This is a tax wrapper where you can put £20,000 per tax year, and your gains are free from tax.
It’s important to note that the Cash ISA limit will reduce to £12,000 for under 65s as of April 2027.
Bed and ISA involves selling your assets held outside an ISA, realising the gain, using any unused ISA allowance for that tax year, and buying the same investments back inside the ISA.
The same thing can be done with a pension – gains in a retirement pot are tax-free too and you will get tax relief on what you pay in up to the lower of an annual allowance of £60,000 or 100 per cent of your UK earnings.
This is known as “bed and SIPP”, with SIPP standing for self-invested personal pension.
The exact process for doing both trades depends on which platform you use, so contact yours to find out.
For example, many platforms, have a “bed and ISA” which you can click that makes the process automated.
Why are people doing this now?
Some people sell assets before Budgets, because they fear increases to rates, and want to lock in gains before rates increase.
There is precedence for this. At the October 2024 Budget, CGT non-property rates rose from 10 per cent to 18 per cent, and higher rates rose from 20 per cent to 24 per cent.
Those who sold assets after the Budget, therefore got hit with higher rates of tax.
Experts say some investors are selling before the Budget this time round, in case the same thing happens again.
“Anecdotally we are once again seeing an increase in ISAs being funded ahead of the Budget and anecdotally, some of this is likely to represent clients undertaking ‘bed and ISA’ trades,” said Jason Hollands, managing director at Best Invest by Evelyn Partners.
Investment platform AJ Bell said “bed and ISA volumes” were up 36 per cent so far for the current tax year to date, compared with last year, but that it couldn’t say this was necessarily down to the Budget.
Michael Healy, CEO of IG Consumer, said: “We’re already seeing signs that uncertainty around CGT may be influencing investor behaviour, with the number of non-ISA investment positions closed by clients in September up 23 per cent on the previous month.
“While we obviously can’t attribute this entirely to tax, speculation around CGT has intensified ahead of the Budget, and we saw just how much rumours around tax changes can affect behaviour with the pension lump sum fiasco last year.”
There have been multiple suggestions that CGT could be increased at the Budget, but nobody actually knows what will happen until Budget day on 28 October.
Is it right for you?
Experts say bed and ISA can be an effective approach for some people, but warn against doing so purely in a panic, without considering options.
If you have unused ISA allowance, and sell before the Budget to put the money into your ISA, and CGT subsequently goes up, you may end up paying less tax than you otherwise would have.
“Clients with shares or funds outside of tax-efficient wrappers, and who have not fully utilised their ISA allowances, have good reason to act,” explained Hollands.
But there are also things to consider too.
“Investors need to consider any gains they have already realised during the tax year and their remaining £3,000 annual exemption,” Hollands said.
If you have already realised £3,000 of gains, you will have paid no tax on them, but realising more could result in a charge.
If you were to wait until the next tax year, then you would get another tax-free £3,000 allowance – assuming this isn’t cut at the Budget – and so waiting until then to realise your gain could reduce your potential tax bill.
Paul Denley, CEO at Oakham Wealth Management, explained: “Selling purely for tax reasons can be counterproductive, so we’re generally bringing forward sales that were already under consideration, while making use of ISAs, pensions, and spousal transfers where appropriate.
“The uncertainty itself is now driving investment decisions, which is rarely a good outcome.”
Philip Dragoumis, director at Thera Wealth Management, added: “For investors who tend to sell and realise gains every tax year anyway, whether to re-invest into an ISA or for other reasons, it does make sense to do this before the budget. The strategy worked well in 2024 and saved tax.
“But selling long-term investments just for the sake of it on worries of higher tax rates in the future is not a sound strategy.”
If you’re unsure of what to do before the Budget, it may be worth speaking to a financial adviser.
Hollands cautions that if you are planning to use the strategy, doing so soon may be wise.
“The 2024 Budget provides a good example of why: the increase in the main CGT rates applied to disposals made on or after 30 October 2024, the day of the Budget. This meant some investors were likely caught out, as trades put through on the morning of the Budget were exposed to the higher rate of CGT that were only announced later in the day,” he said.