27 February 2020
A little-known tax relief could help investors make the most of personal allowances and maximise their returns on investments over the long term, according to Brewin Dolphin.
The wealth manager is encouraging savers to crystallise gains and look at a ‘Bed and ISA’ transaction ahead of the end of the tax year on 5 April, which could save them thousands of pounds in tax liabilities.
A Bed and ISA is a transaction that involves selling stocks or shares from a portfolio and immediately buying them back within a tax-efficient ISA. The returns on the investments held within the ISA are then sheltered from capital gains (CGT) and income tax.
Using CGT allowances
Under current tax-free allowances, individuals can make up to £12,000 per year of capital gains on an asset before paying tax on it. However, in order to take advantage of any gains, an investment must be sold – realising the gain (or loss), with tax payable at that point.
If an individual crystallises gains up to £12,000 on a stock or share and re-invests it into an ISA, they can make the most of their annual allowance while keeping a potentially lucrative investment – all without incurring CGT.
Alternatively, if they leave the investment outside of the ISA wrapper accruing gains every year, when they come to sell the assets they could face a hefty tax bill.
How you are taxed on gains
Higher or additional rate taxpayers pay CGT at 20% on chargeable gains such as stocks and shares and 28% on gains from second homes.
The CGT rate for basic rate taxpayers depends on the size of their gains, their taxable income, and the type of asset. CGT allowances can only be applied on an annual basis – they cannot be carried forward.
A higher rate taxpayer selling a collection of shares with gains totalling £100,000 over 10 years could face a tax bill of £20,000 when they come to sell the portfolio (if they have used their £12,000 tax free CGT allowance already), compared to nothing if the shares were originally purchased in an ISA.
Offsetting losses elsewhere
An additional way of saving on a CGT bill can be offsetting losses elsewhere in a portfolio when using a Bed and ISA transaction.
If, for example, an individual wanted to take out £15,000 of gains, they would need to pay CGT on £3,000 of the balance. However, if they were to offset that £3,000 using losses from another investment, they may have no CGT to pay and could use the Bed and ISA transaction as usual.
Jo Douglas, financial planner at Brewin Dolphin, said: “There are numerous advantages to a Bed and ISA transaction. It’s a great way of using up CGT allowances, keeping hold of a stock or share in which you have strong conviction, and ensuring that any further gains and income on that investment are in a tax-efficient wrapper.
“Even in those situations where other areas of a portfolio have performed less well, offsetting any losses against the gain on a successful investment means a Bed and ISA approach can still be employed to its full potential.
“Crystallising the gains made on an investment up to your CGT allowance is an annual consideration for investment managers like us and should be for people when preparing for the end of the tax year – especially those who have made significant profit over the year.”
Analysis from Brewin Dolphin on some of the best performing companies over the previous decade demonstrates how much an individual could have saved by using a Bed and ISA transaction initially.
Amazon
E-commerce giant Amazon has been one of the stand-out stock picks of the last decade, with its share price surging by a phenomenal 1622%. A year-on-year increase has spiked over the last two years in particular as it has successfully entered new markets, including video streaming and artificial intelligence for smart devices.
Brewin Dolphin has calculated that an investment of £7,200 (the ISA allowance in 2009/10) in Amazon at the start of 2010 returned £98,903.12 at the beginning of 2020. To crystallise that gain based on the current rate of CGT minus the allowance, a higher-rate taxpayer would pay £22,316.87. However, had they used a Bed and ISA transaction and bought the stock within an ISA initially, they would have no CGT to pay.
Richard Umpleby, investment manager at Brewin Dolphin, said: “The success of Amazon has been well-publicised and continues as it enters new growing markets. Although it pays no dividend, investors would have done well to capture the huge share price appreciation in the stock over the last decade had they invested within an ISA. The capital gains tax saved, were they to sell the position after such strong growth, would be significant.”
Visa
Financial services company VISA is another high-profile success story of the last decade, with a share price increase of 851%. The credit card multinational has managed to consistently boost its dividends as well as share growth, making it one of the most successful investments in recent times.
An initial investment of £7,200 in Visa at the start of 2010 (the ISA allowance in 2009/10) would have returned £61,874.23 at the beginning of 2020. To crystallise that gain based on the current rate of CGT minus the allowance, a higher-rate taxpayer would pay £11,948.78. However, had they used a Bed and ISA transaction initially and invested the stock within an ISA, they would have successfully mitigated their gain and not been liable to pay any CGT.
Richard Umpleby said: “It’s not difficult to see why Visa has performed so well over the last 10 years. It holds a near duopoly with MasterCard over card payments and in recent years has been able to take hold of the contactless market as well. Every time we pay for something online or in a shop, there is a good chance that a visa card or device will be in use and so it’s value as a company is deep-rooted. Holding it within an ISA not only shelters the capital gain on the shares, but the dividend income it has produced too, bolstering the return after tax significantly.”
Ashtead
Construction and industrial equipment company Ashtead is an example of a company which has performed well on the FTSE, seeing an increase in its share price of 2,905% since the start of 2010.
An initial investment of £7,200 in Ashtead at the start of 2010 would have returned £214,049.26 at the beginning of 2020. To crystallise that gain based on the current rate of CGT minus the allowance, a higher-rate taxpayer would pay £57,917.79. However, had they used a Bed and ISA transaction initially and invested the stock within an ISA, they would have successfully mitigated their gain and not been liable to pay any CGT.
Richard Umpleby, investment manager at Brewin Dolphin, said: “Operating in an inherently cyclical part of the market, Ashtead was on its knees in the wake of the global financial crisis. In the time since, however, the company has gone from strength to strength, having taken advantage of structural growth and consolidation within the construction rental equipment market, principally in the US but also other geographies. The share price growth has been substantial for shareholders, dwarfing the relatively small dividends, and is a good example of why it is important to focus on the two elements of return – capital growth and income.”
The three examples of Visa, Amazon and Ashtead highlight just how much could be saved if a bed and ISA approach is used effectively, but other options are available.
Jo Douglas said: “Investment managers and financial planners will look at the allowances a client is entitled to and ensure they use these up, while also being able to recommend the stocks and shares to best utilise an ISA portfolio.”
-ENDS-
PRESS INFORMATION
For further information, please contact:
Peter McFarlane peter.mcfarlane@framecreates.co.uk / Tel. +44 (0) 141 559 5840
Cameron Hill cameron.hill@framecreates.co.uk / Tel. +44 (0) 141 559 5840
Richard Janes richard.janes@brewin.co.uk / Tel. +44 (0) 20 3201 3343
Anita Turland: anita.turland@brewin.co.uk / Tel: (0) 20 3201 4263
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
NOTES TO EDITORS
Disclaimers:
The value of investments and any income from them can fall and you may get back less than you invested
The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.
Past performance is not a guide to future performance.
We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk.
This information is for illustrative purposes only and is not intended as investment advice.
No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
If your clients invest in currencies other than their own, fluctuations in currency value will mean that the value of their investment will move independently of the underlying asset.
Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
About Brewin Dolphin
Brewin Dolphin is a UK FTSE 250 provider of discretionary wealth management. With £45.0* billion in total funds, it offers award-winning personalised wealth management services that meet the varied needs of our clients including individuals, charities and corporates.
We give clients security and wellbeing by helping them to protect and grow their wealth, in order to enrich their lives by achieving their goals and aspirations. Our services range from bespoke, discretionary investment management to retirement planning and tax-efficient investing. Our focus on discretionary investment management has led to significant growth in client funds and we now manage £40.1* billion on a discretionary basis.
Our intermediary business manages over £13.8* billion of assets for over 1,700 advice firms either on a discretionary basis or via our Managed Portfolio Service.
In line with the premium we place on personal relationships, we’ve built a network of 32 offices across the UK, Jersey and Dublin, staffed by qualified investment managers and financial planners. We are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
*as at 30th September 2019
Share Price
Company 2016 2017 2018 2019 2020
Amazon 118% 11% 56% 28% 23%
Visa 18% 1% 46% 16% 42%
Ashtead -3% 41% 26% -18% 47%