With the start of the new tax year behind us, now is a good time to consider how you could make your investments work harder and more efficiently for you.
After all, tax-efficient investing is a core part of building long-term wealth and maximising your potential for returns. That’s why understanding and making use of tax-efficient investment strategies could have a positive effect on your overall financial wellbeing.
One such strategy is the “Bed and ISA” technique, which could help reduce your tax bill. Here’s what you need to know.
“Bed and ISA” could help you grow your investments tax-efficiently
The Bed and ISA process may sound confusing, but the underlying concept is straightforward. Essentially, it involves a carefully orchestrated two-step process.
- First, you would sell investments that you currently hold outside the protective umbrella of an Individual Savings Account (ISA).
- Then, you repurchase the same investments within the secure and tax-efficient ISA wrapper.
This could help you grow your savings and investments without paying tax on income, dividends, or capital gains.
The name originates from an older practice known as “Bed and Breakfasting”.
Here, investors would strategically sell assets, often towards the end of a tax year, to crystallise any capital gains (or losses) for tax purposes, then swiftly buy those same assets back. Effectively, the investors were “putting them to bed” for a short period before “waking them up” in the new tax year.
A Bed and ISA strategy could help shield your assets from tax
One of the key advantages of this technique is that it can shield your existing investments from potential future Capital Gains Tax (CGT) and Income Tax liabilities.
You can distribute your funds across different ISA types, as long as your contributions remain within the annual subscription limit. This is £20,000 for the 2025/26 tax year, and certain other restrictions apply to specific accounts. Remember, while you won’t pay tax when accruing or withdrawing the wealth in your ISA, when passed down as part of your estate, the funds could incur Inheritance Tax (IHT).
Let’s explore some of the benefits in more detail.
The Capital Gains Tax benefits
Any profits you accrue when you decide to sell your investments outside of an ISA are potentially subject to CGT. The exact amount of CGT you may pay depends on your tax band, the type of asset you sell, and the gains you receive.
However, a key advantage of an ISA is that any capital gains generated on investments held within it are free from CGT. Over the long term, as your investments grow in value, this could translate into substantial savings.
Keep in mind that, when you initially sell holdings held outside of your ISA, you may be liable for tax on any profits you make that exceed your CGT Annual Exempt Amount. This is £3,000 for the 2025/26 tax year.
Once your investments are inside the ISA wrapper, you won’t pay tax on future returns.
The Income Tax benefits
If you hold interest-generating assets outside of an ISA, you could be required to pay Income Tax on the interest if it exceeds your Personal Savings Allowance (PSA).
The amount of PSA you benefit from each year depends on your tax bracket.
In 2025/26:
- Basic-rate taxpayers and non-taxpayers can earn £1,000 in tax-free interest.
- Higher-rate taxpayers can earn up to £500 in tax-free interest.
- Additional-rate taxpayers have no PSA.
Fortunately, you won’t need to pay Income Tax on any savings held within an ISA.
Strategically transferring your wealth into an ISA could help you make the most of your gains
Since the new tax year has just begun, your ISA allowance of £20,000 will have “refreshed”. By strategically implementing the Bed and ISA process early in the tax year, you could take full advantage of your newly available allowance to transfer portions of your existing investments into a secure and tax-efficient environment.
Taking early action here could mean that your money has more time to benefit from tax-free growth for the entire duration of the tax year, not just the last few months.
Using the Bed and ISA strategy, particularly with the help of a financial planner, you could support tax-efficient growth across your portfolio and bolster your long-term financial success.
It is unwise to conduct the Bed and ISA process without taking advice; speak to your ISA provider or a financial planner for guidance before you proceed.
Get in touch
The start of a new tax year is a great opportunity to review your financial plan. If you haven’t had a review yet or want to discuss your options, we’re here to help.
Email us at [email protected], or call 01273 076 587.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
