Bed and ISA – not so straightforward anymore?

Benjamin Franklin once said: “In this world nothing can be said to be certain, except death and taxes”. You could possibly add change to this, but the statement is indubitably as true now as it was then.

And from a tax perspective, the reduction in the Annual Exemption Allowance (AEA) for Capital Gains Tax (CGT) may well cause a few new headaches for advisers.

For the tax year 2023/24, the AEA for CGT reduced to £6,000 (from £12,300 in the 2022/23 tax year), with a further reduction to £3,000 scheduled from April 2024. Herein lies a problem.

Firms have tended to routinely recommend ISA and GIA investments with the intention of performing a Bed and ISA exercise at each annual review (and you are conducting reviews at least annually aren’t you?) to take full advantage of the annual ISA allowance, but the AEA reduction has made what was usually a no-brainer into a potentially more problematic exercise, and it certainly hasn’t helped when it comes to considering a GIA within large lump sum investments.

A GIA could possibly have been argued to be more tax efficient than an ISA at times, as an ISA only shelters growth/income from tax and has an annual investment limit of £20,000, whereas a GIA provides an annual CGT exemption, has no annual contribution limit and careful planning can make an income stream and gains crystallisation very tax efficient, but the AEA reduction has made this far more challenging.

From our experience, advisers seem to routinely maximise ISA contributions each year, but few appear to utilise clients’ use it or lose it annual CGT exemption, the argument frequently being that they’re not tax advisers (neither are DFMs but most seem to be able to use clients’ CGT exemptions each year). Strange then that we regularly see estates for IHT purposes valued (by advisers) virtually to the penny.

This reduction in the AEA may open a new can of worms for advisers, when clients unwittingly exceed the AEA threshold and face an unexpected CGT bill, they may well question why their AEA wasn’t used in previous tax years. After all, they’re paying their adviser for an ongoing review service aren’t they?

Good job that firms thought about this in their Fair Value Assessments isn’t it? You haven’t yet? Maybe it’s time to do so!

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

Firms may have missed this consequence of the reduction in CGT AEA, so a review of Bed and ISA processes would be appropriate. Clients who pay for an ongoing review service must receive a formal written assessment of continued suitability at least annually. This has to be based on up to date know your client information or the client’s confirmation, prior to the assessment, that there have been no material changes in their financial situation, objectives or risk profile. Both ISA and CGT AEA are ‘use it or lose it’ tax breaks, so care is required to play these off against each other. Leaving assets in a GIA to avoid CGT probably only defers the issue (unless the value falls) but that CGT liability does not go away, in fact it probably only increases. Doing so and not performing Bed & ISA risks losing the ISA allowance for the year. Or forever, if the GIA is the only source of funds for ISA and the GIA is now laden with taxable gains.

Action Required By You

Make sure that all reviews are conducted at least annually (see COBS 9A.3.9) and that exemptions and allowances are used wherever possible.
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About the Author

Lisa has a wide range of skills and knowledge, and a track record of implementing compliance and T&C systems and processes of the highest calibre, covering all aspects of financial services.

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