"Bed and ISA" - moving investments from stocks & shares into ISA?

br1anst0rm

I'm retired, a non-expert saver and not very knowledgeable investor, probably in the 'cautious' category and not motivated to follow the city pages and trade frequently.

I'm lucky enough to have a defined-benefit (public sector) pension, mortgage free, with wife but no children, and I'm now approaching my 75th birthday (still fairly healthy, but old age and the prospect of care homes looms on the horizon).

I'm trying to review our financial situation and plans.  Sadly my few past experiences with financial advisers have not been good:  mis-selling, and inappropriate investments.  So for the past few decades I have saved and invested into ISA, SIPP and shares on an individual independent basis via platforms like HL and Fidelity, and put some money into National Savings and bank deposits.

We have lots of decisions to make (eg about what to do with SIPP and AVCs, and my wife's stakeholder pension).  But this post is about one specific part of our savings and investments:  our ISAs.

For the past 15 years or more we have managed to save the maximum annual amount into each of our ISAs by regular monthly contributions.  Most is invested in unit trusts, a few investment trusts, and various shares.  Our two ISA accounts together now hold just about £900k.

Separately on a sporadic ad hoc basis we have also bought shares which are in a 'Fund & Share account' (ie not tax-sheltered).

With the threat of taxes (CGT and IHT) becoming ever more ominous, I am contemplating reducing the investments liable to tax by shifting shares currently held in the Fund & Share account into our ISAs (the so called 'bed and ISA" process).  In effect I would be using share proceeds as ISA contributions (up to the annual limit), which would mean reducing or ceasing our regular monthly direct debits from current income.

I realise that this is only one element in our planning and the obvious adviser-view would be that a holistic review of all our finances and our personal circumstances is essential.

But with that caveat - would this 'bed and ISA' exercise be a sensible move?  Any downsides?

IanManc

When you do "bed and ISA" you sell investments which are outside the ISA, move the cash into the ISA, and buy investments inside the ISA.

"Bed and ISA" therefore still involves a sale outside the ISA and so any excess gains above your £3k CGT allowance which each of you have would be subject to CGT.

Albermarle

With the threat of taxes (CGT and IHT) becoming ever more ominous, I am contemplating reducing the investments liable to tax by shifting shares currently held in the Fund & Share account into our ISAs (the so called 'bed and ISA" process).

Doing this will have no effect on your IHT position, as all assets are counted, including from 2027, any unused DC pension pots .

dunstonh

But with that caveat - would this 'bed and ISA' exercise be a sensible move?  Any downsides?

Yes.   Indeed, you should have been doing bed & ISA and Bed & pension each year and ideally trading to use your CGT allowance annually.    None of this has any impact on IHT though.

Nothing has changed in the respect of the recent budget other than to increase the CGT rates.   

br1anst0rm

Thanks for those comments.... keep 'em coming!

Of course @dunstonh is right to tell me I should have been more proactive (or better informed).  I guess I've been more of a "fire and forget" saver and investor, rather than intervening regularly to minimise tax liability.  Having not been in the habit of disposing of shares, I'm not aware that I have ever made sufficient capital gains to have to pay CGT.

I deduce from @IanManc 's reply that I could at least 'bed & ISA' some shares into the ISAs, providing the gain on the share-sales in any given financial year was below £3k...

The IHT aspect (as per @albemarle s comment) is probably a separate strand of discussion.  I understood that ISA holdings could pass free of IHT to a surviving spouse.  My wife if I predecease her would also get the 'widow's' entitlement of my public sector defined-benefit pension.  But I guess the taxman would look to collect IHT on my other assets - including those (like the SIPP to which I've contributed since retirement from my full-time employment) which are regarded as "DC pensions".

IanManc

br1anst0rm said:

Thanks for those comments.... keep 'em coming!

I deduce from @IanManc 's reply that I could at least 'bed & ISA' some shares into the ISAs, providing the gain on the share-sales in any given financial year was below £3k...

The IHT aspect (as per @albemarle s comment) is probably a separate strand of discussion.  I understood that ISA holdings could pass free of IHT to a surviving spouse.  

Yes you should be using your CGT allowance every year, as should your wife.

Your whole estate passes free of IHT to your spouse or civil partner.

poseidon1

Bed & Breakfasting investments in your GIAs into your respective ISAs seems eminently sensible to me. 

 However you have not indicated whether either of you pay income tax at higher rates.  Even if you do not,  I would be inclined to bed and breakfast income generating investments first, the effect of which will be to increase your tax free spendable income assuming you do draw investment income from your respective ISAs regularly.  

As for GIA investments which are growth orientated, keep in mind that on first death of either  of you, those investments receive a capital gains tax free uplift to market value in the estate of the deceased spouse, thereby erasing those gains for the benefit of the inheriting spouse.

If you are of the view you might die before your wife, there could be a benefit in transferring GIA investments from her portfolio to you ( no tax on inter spouse transfers) , and eventually erasing her portfolio  gains on your death. Its a bit of a gamble but worth considering.

Nothing much you can do about the eventual IHT hit on 2nd death   ( unless charitable gifting appeals  ) but in the interim you can maximise your income tax and cgt savings by prudent re-arranging of your respective investments with the ISAs playing an important role.

br1anst0rm

poseidon1 said:

Bed & Breakfasting investments in your GIAs into your respective ISAs seems eminently sensible to me. 

 However you have not indicated whether either of you pay income tax at higher rates.  Even if you do not,  I would be inclined to bed and breakfast income generating investments first, the effect of which will be to increase your tax free spendable income assuming you do draw investment income from your respective ISAs regularly.  

As for GIA investments which are growth orientated, keep in mind that on first death of either  of you, those investments receive a capital gains tax free uplift to market value in the estate of the deceased spouse, thereby erasing those gains for the benefit of the inheriting spouse.

If you are of the view you might die before your wife, there could be a benefit in transferring GIA investments from her portfolio to you ( no tax on inter spouse transfers) , and eventually erasing her portfolio  gains on your death. Its a bit of a gamble but worth considering.

Nothing much you can do about the eventual IHT hit on 2nd death   ( unless charitable gifting appeals  ) but in the interim you can maximise your income tax and cgt savings by prudent re-arranging of your respective investments with the ISAs playing an important role.

Thanks @poseidon1 - I'll try to address each point.

- it did seem sensible to do at least some 'bed & ISA' -ing, hence my original post.

-  neither of us pays higher-rate tax, although my work pension plus state pension plus savings-interest puts me close to the threshold.  My wife is a non-earner, non-taxpayer who gets only a partial state pension based on my contribution record (that's a whole different story...).

- while we continue to make regular monthly ISA contributions, we opted not long ago to have the dividend/interest income from our ISAs paid out rather than compounded.  So this does augment our pension-income.

-  I was unaware that investments [ISAs only, or all?] got a capital-gains free uplift to market value on the death of the holder, thus sparing the survivor a CGT charge.  Any risk that this "benefit" or concession might be abolished in the coming years?

- my wife's GIA investments are minimal, so there may be merit anyway in simplifying things by shifting her few shares into her ISA.  Good to know that inter-spouse transfers, either way, are tax-free.  I'm not predicting which of us might die first....!

We still need to grapple with the longer term planning regarding wills, bequests, legacies, charitable giving , IHT implications etc.  Annuities too?  We may have to seek the help of advisers, despite having previously been burned.  That is another hurdle to tackle along with, or after, any 'bed & ISA' rearrangements.

Albermarle

We still need to grapple with the longer term planning regarding wills, bequests, legacies, charitable giving , IHT implications etc.  Annuities too?  We may have to seek the help of advisers, despite having previously been burned.  That is another hurdle to tackle along with, or after, any 'bed & ISA' rearrangements.

Regular reading of the main Savings and Investments forum the Pensions forum, and the Probate forum, should improve your knowledge in these areas.

poseidon1

br1anst0rm said:

poseidon1 said:

Bed & Breakfasting investments in your GIAs into your respective ISAs seems eminently sensible to me. 

 However you have not indicated whether either of you pay income tax at higher rates.  Even if you do not,  I would be inclined to bed and breakfast income generating investments first, the effect of which will be to increase your tax free spendable income assuming you do draw investment income from your respective ISAs regularly.  

As for GIA investments which are growth orientated, keep in mind that on first death of either  of you, those investments receive a capital gains tax free uplift to market value in the estate of the deceased spouse, thereby erasing those gains for the benefit of the inheriting spouse.

If you are of the view you might die before your wife, there could be a benefit in transferring GIA investments from her portfolio to you ( no tax on inter spouse transfers) , and eventually erasing her portfolio  gains on your death. Its a bit of a gamble but worth considering.

Nothing much you can do about the eventual IHT hit on 2nd death   ( unless charitable gifting appeals  ) but in the interim you can maximise your income tax and cgt savings by prudent re-arranging of your respective investments with the ISAs playing an important role.

Thanks @poseidon1 - I'll try to address each point.

- it did seem sensible to do at least some 'bed & ISA' -ing, hence my original post.

-  neither of us pays higher-rate tax, although my work pension plus state pension plus savings-interest puts me close to the threshold.  My wife is a non-earner, non-taxpayer who gets only a partial state pension based on my contribution record (that's a whole different story...).

- while we continue to make regular monthly ISA contributions, we opted not long ago to have the dividend/interest income from our ISAs paid out rather than compounded.  So this does augment our pension-income.

-  I was unaware that investments [ISAs only, or all?] got a capital-gains free uplift to market value on the death of the holder, thus sparing the survivor a CGT charge.  Any risk that this "benefit" or concession might be abolished in the coming years?

- my wife's GIA investments are minimal, so there may be merit anyway in simplifying things by shifting her few shares into her ISA.  Good to know that inter-spouse transfers, either way, are tax-free.  I'm not predicting which of us might die first....!

We still need to grapple with the longer term planning regarding wills, bequests, legacies, charitable giving , IHT implications etc.  Annuities too?  We may have to seek the help of advisers, despite having previously been burned.  That is another hurdle to tackle along with, or after, any 'bed & ISA' rearrangements.

Your question re the continued availability of the CGT free uplift of all assets on death is a valid one. The facility was introduced by the Taxation of Capital Gains Act 1992,  with a view to ensuring that  deceased's  assets  should not attract two different capital taxes by reason of death ( IHT + CGT ). 

However, periodically the institute of Fiscal Studies ( IFS ) have a bit of a moan about this statutory provision and predicably  raised this again as something the new Labour  administration could consider during their reign. The article below discusses this.

https://www.evelyn.com/press-centre/all-press-releases/capital-gains-tax-on-death-could-see-families-double-taxed-on-estates/#:~:text=APPG - no CGT uplift.,at the donor's base cost.&text=IFS - abolish the uplift of,to the estate to pay.

Thankfully the government left this alone, opting instead to introduce IHT on DC pension pots on death.

I understand your predicament with regard to future IHT planning and income security. Occurs to me you could look to the services of a qualified Chartered Financial Planner to provide you with a technical overview of your current joint asset/income position, your investment strategy and perhaps help provide guidance with regard to the direction of your estate planning. Link to the Chartered Insurance Institute members directory below  might assist in finding a suitable firm.

https://www.cii.co.uk/membership/join-us/chartered/chartered-firm-search/#:~:text=Find a Chartered firm,you, use the search below.