Best way to transfer AIM shares to ISA?

bowlhead99

s79 wrote: »

Touch wood, fingers crossed etc etc I could go over the 10k CGT limit and maybe (hopefully) this year, so i guess it is worth me doing it right?

You only pay tax on the excess of profits (after deducting any losses) that you cash in, in a particular tax year. So if you had bought some shares for 5k that are now worth 16k you are looking at an 11k gain.

If you sell all of them this year on 31 March 2014, the week before the end of this tax year, you pay tax on the last bit of profits above the 10k(ish) annual exemption. So you would be looking at paying 18% tax on the (say) 1k of excess profits (say £180), and you would need to pay it by the following January 2015.

Instead, you could sell half of them (for 8k, making a 5.5k gain) on 31 March 2014 and then the other half of them (for another 8k, making a 5.5k gain) on 7 April 2014. You didn't go over the limit in either tax year because in each year you had 10k of CGT exemption and you only used a little over half of it.

So, you don't have to put these shares in an ISA, if the gains are manageable. You are right, you will lose dealing costs and bid-offer spread if you put them in an ISA, which might be a waste of money (I've easily seen spreads over £180 on 10k of AIM shares before) and you will be using up ISA capacity which will then be lost forever if you are just going to take the final sale proceeds out to spend it rather than reinvest in other stuff.

Using up the ISA capacity for this in 2013/14 is absolutely fine if you were not going to be able to fill your ISA this year anyway. But if it doesn't really save much tax, and you could instead use it for something else (like a tax protected wrapper around some of your savings which would save you tax on interest on your rainy-day fund over the next 20 years or so), it could be a waste of a valuable weapon in your armoury against the taxman.

What does bed-and-ISA mean exactly? Is that the process of the broker handling the selling and consequent buying of shares into the ISA?

Basically yes. Though it doesn't have to be the broker handling it themselves as one linked transaction, you could do it yourself manually, even using two entirely different brokers and move the cash into the second broker's ISA yourself to manually re-buy. But brokers know people like to do it so might offer cut price trading costs to do it themselves and help their marketing.

It comes from the phrase 'bed and breakfast' which was a practice of selling lots of shares on the last day of a tax year to make a gain and use up your allowance, and then buying them back the very next morning to start again with a higher base cost and a lower future tax bill.

The practice of 'bed and breakfasting' for individual shares has been cut out a bit because if you buy shares in a company and then buy back some of the exact same shares a few days later, HMRC will these days tie those two transactions together and say that the 100 shares you bought on 7 April were the 100 you sold on 4 April, and the ones you bought five years ago for pennies are still in your account and will have a nice big bill to pay when you sell them for pounds in the future.

Of course if you buy back slightly different shares (e.g. you sell an HSBC index fund and then two days later buy a Vanguard index fund), you can still pretty much exploit the loophole. But you can't do it with individual shares in ABC plc. But what people can do instead of Bed and Breakfast, is Bed and ISA - sell some of the ABC shares to take a certain amount of gain, and then put the proceeds into the ISA and buy the shares back outside the scope of tax.

Also i (don't think) I've used my cash ISA allowance for this tax year so can I use the full £11,520 allowance purely for the Stocks and Shares ISA?

Yes. If you do think the shares you hold will go up, and after reading the above you want to put some of them into the ISA to get relief on future gains (and dividends, if they end up paying some and you end up being a high rate taxpayer), you would probably want to do it sooner rather than later so that you consume less of the 11,520 subscription allowance.

One final question, say i want to sell my shares (that are now hypothetically in the ISA) how does it differ from a normal share dealing account? Does it work like a cash ISA, i.e. if you empty the account you lose the tax free benefits?

Yes. You sell the shares and instead of your portfolio being say £10,000 of Company A plc and £5 of cash, it becomes £10,005 of cash (less fees to sell). You can withdraw this cash to your own bank account, but that means taking it out of ISA status and just like with a cash ISA, you will only have capacity to re-contribute the unused remainder of that year's subscription allowance - which might be quite low or nil.

Also as a side note, you can transfer cash ISAs into shares ISAs to give you more cash in your ISA sharedealing account to buy these (or other) shares. You would do this by having your broker handle the transfer - I've moved money from previous years' Lloyds and NS&I cash ISAs into my existing TD Direct shares ISA this year. But what you can't do is transfer it back the other way, i.e. S&S ISA to cash ISA. Only way to get it back as cash earning semi-competitive rates of savings interest is to take it out to your own bank account and lose the tax wrapper.

Hope that covers it