Capital gains: How do the ‘Bed and ISA’ rules work?

Q: The bulk of my investments are with Fidelity, but I also have a share holding administered elsewhere which consists of shares arising from various employee schemes run by my ex employer. Some are held within an ISA, the remainder outside.

Over the years, I have been using the Bed and ISA facility to shield the shares against any CGT liability, however with the reduction in the limit to £3,000, it is becoming very difficult to avoid.

Can you confirm if I have got the CGT rules correct as they relate to Bed and ISA transactions? If, on the same day, I ‘Bed and ISA’ £20k of my shares, the CGT liability is based on the difference between the sale price and the cost of buying them back in the ISA rather than the average cost in Section 104 holding.

This appears to be something to do with the '30 day rule' but the cost difference, hence the CGT will be small. I can't believe I've got this right. Can you enlighten me?

A: Capital Gains Tax has become a more pressing issue for many investors, with the annual tax-free allowance reducing to just £3,000 and the Chancellor increasing main rates of CGT increasing at the end of October — from 10% to 20% for basic rate taxpayers, and 18% to 24% for higher and additional rate taxpayers.

'Bed and ISA’ is way to effectively ‘mop up’ your CGT allowance each year — and shift assets into a tax-free ISA, where future gains are not subject to this tax. 

In practice, this involves selling shareholdings of up to £20,000 and transferring this money into an ISA each year, where you can repurchase these shares. This holding will then be protected from any future CGT. 

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Selling and then buying back shares the next day may seem a somewhat laborious process, but it should be noted investors can’t usually transfer shares directly into an ISA.

The £20,000 relates to the maximum that can be invested into an ISA each year. However depending on the gains you have made on these shareholdings, you may want to transfer less.

CGT is calculated on the gains made, ie the difference between the price you bought these shares for and the price you are now selling them for, before investing in the ISA. If this is more than £3,000 the CGT will have to be paid. The price at which you repurchase the shares within the ISA is not relevant here, as from that point the shares are effectively in a CGT-free environment. 

In your case it appears the £20,000 if the full value of the shares being sold — to make the most of your annual ISA allowance — not the gain.

For shares bought over time, Section 104 rules apply, which pool the purchase costs to calculate the relevant gain on the portion being sold.

Robert Salter, tax technical director at accountancy firm Blick Rothenberg points out that there may be also other considerations. You state these shares are held in various employee schemes. Salter says some ‘Save As Your Earn’ (SAYE) schemes and Share Incentive Plans (SIPs), for example can be transferred into a share-related ISA. However he points out that there are a number of different arrangements and you would need to check out the details of the particular scheme. 

He also cautions that while ‘Bed and ISA’ is a useful way to mitigate future CGT liabilities it does mean any future losses on these shares won’t qualify for general CGT loss relief. 

Finally, a quick word about the somewhat arcane ‘Bed and ISA’ terminology. This stems from a practice, called ‘Bed and Breakfasting’ where investors sold shares one day (to crystallise their full annual CGT allowance) and bought them back the next day — effectively to set the CGT clock ticking again at a new ‘base price’. This tax-planning wheeze was outlawed more than 20 years ago. But the term has persisted when it comes to these ‘Bed and ISA’ transactions. 

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. Tax treatment depends on individual circumstances and all tax rules may change in the future. If you are unsure about the suitability of an investment you should speak to one of   Fidelity’s advisers or an authorised financial adviser of your choice.