How to tax-proof your investment portfolio

Even before the recent Autumn Budget, investors were rushing to make their investments as tax-efficient as possible.

New data from Interactive Investor shows a 49% month-on-month increase in users transferring existing investments into an Isa – a process known as ‘bed and Isa’ – in the month leading up to the Budget on 30 October.

The rate of capital gains tax on the sale of shares was increased in the Budget from 10% to 18% for basic-rate taxpayers, and from 20% to 24% for higher and additional-rate taxpayers.

With more tax to pay, the annual Isa allowance is more valuable than ever. Read on to find out how to make the most of it.

Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.

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Taxes you need to pay on your investments

Any investments held outside of an Isa (in a general investment account, for example) will be subject to tax.

When you invest, you might need pay the following taxes:

• Income tax on interest from funds and trusts
• Dividend tax on dividend income
• Capital gains tax (CGT) on profits made when selling investments.

You'll only need to pay these taxes if you exceed your tax-free allowances. 

For income tax, basic-rate taxpayers have a personal savings allowance of £1,000. Higher-rate taxpayers get £500, and additional-rate taxpayers don't receive any allowance. 

For dividend tax, there is a flat allowance of £500, and for CGT you can make a profit of £3,000 before you incur any tax.

The amount of tax you'll pay on your investments depends on what income tax bracket you're in. Income tax varies from 20% to 45%, and dividend rates range from 8.75% to 39.35%.

• Find out more: tax on savings and investments

How does a 'bed and Isa' work?

A 'bed and Isa' transaction is a cost-effective means of moving taxable investments into an Isa.

You can’t move shares directly from a general investment account to an Isa and - normally - you can’t sell and then repurchase the same investment within 30 days.

The bed and Isa process allows you to sell an asset in a general investment account and repurchase the same asset straight away in an Isa, junior Isa or Sipp.

Craig Rickman of Interactive Investor says: 'For those who are yet to bed and Isa this tax year, the good news is there’s still time. You have until 5 April 2025 to act, but don’t leave things till the last minute as your provider may need a few weeks to process the request.

'If you have holdings in a general investment account or equivalent, and provided you have sufficient spare Isa allowance, it’s wise to use this year’s CGT exemption to bed and Isa before it’s lost. This will shelter any future gains on these holdings from tax.'

How returns differ

Calculations from Vanguard show the difference in returns for an investor paying higher-rate tax who had two pots of £100,000 – one in an Isa and one in a general investment account. 

In one scenario, they move £20,000 of their investments in the general investment account across to the Isa over five years; in the other they leave it.

Over 10 years, assuming 5% growth, returns would be £13,625 higher in the scenario that made use of the bed and Isa process.

• Find out more: the best stocks and shares Isas

What are the limitations of a bed and Isa process?

Most investment platforms will only process a bed and Isa for you on UK-listed investments, including shares, ETFs, investment trusts and bonds, but not investment funds (also known as OEICs and unit trusts). 

You also won’t be able to make use of the process if you’ve already used your £20,000 annual Isa allowance.

If in the process of selling and repurchasing your investments, you make a profit of more than £3,000 on the investments you sell to transfer across, you'll need to pay CGT on that profit.

The act of selling and repurchasing investments itself may cost you too, depending on how the price of the investment changes in the time between transactions. 

Even when you’re cutting down the amount of time between selling and buying back shares, if the share price goes up, you could end up with fewer shares for the same amount of money.

You’ll also have to pay stamp duty of 0.5% on the sale of any shares.

• Find out more: types of investment explained

Which platforms offer bed and Isa?

Many newer investment platforms, and those with a more limited offering, don’t offer a single bed and Isa process.

Some of those that do offer a dedicated service will only charge trading fees for one part of the transaction instead of both the purchase and the sale, while other platforms already have no trading fees at all.

The bed and Isa processes on offer

How do you get started with a bed and Isa?

To make use of the bed and Isa process, you'll need to have some of your £20,000 annual Isa allowance left, or you'll need to wait until the new tax year on 5 April 2025, when your allowance renews.

You’ll also require a stocks and shares Isa with the same provider as your general investment account. You can open more than one stocks and shares Isa in a single tax year, if you don’t currently have an Isa with the same provider.

You can kick off a bed and Isa transaction either over the phone or through a dedicated online channel, where you’d select the investments you want to move across.

Not every investment platform will allow you to make a bed and Isa transaction in one single process, in which case you’ll have to sell your assets to cash, move the cash to your Isa,  and then repurchase it yourself.

• Find out more: the best investment platforms in the UK