Can shares be transferred into an ISA?

Is it possible to benefit from the long-term tax advantages of an ISA with shares that are currently held elsewhere?

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The simplest answer to whether you can transfer shares into a stocks and shares ISA is ‘no’, because you can’t directly transfer shares from a share-dealing account into an ISA. However, there’s a bit more nuance to that.

What investors can do is sell shares held in a dealing account and then buy them back within an ISA in a process known as a ‘bed and ISA’. While this isn’t a direct transfer, in many cases, this can achieve the ends of an investor looking to transfer shares into an ISA. Of course, there are risks involved in a ‘bed and ISA’, such as price changes between sale and purchase. Capital gains tax may also be due on any profits made on the shares.

However, with an ISA offering significant tax advantages when it comes to the treatment of capital gains and dividends when compared with a share-dealing account, maximising the annual £20,000 ISA allowance seems to be a shrewd move.

The bed and ISA process

It is fairly straightforward to sell shares that are held outside an ISA and then buy them back within an ISA. With most investors now utilising online sharedealing accounts, the process can be as simple as a few clicks of a mouse button.

The costs associated with having an ISA, such as management charges and the costs of buying and selling shares, are often similar to those of a sharedealing account.

The idea of selling shares and buying them back in an ISA could be a sound one in the long run. Shares held within an ISA are not subject to capital gains tax. Similarly, no dividend taxes are levied on any income received. Dividend taxes in particular have become increasingly onerous in recent years; by transferring shares into an ISA, investors may be able to side-step any further government changes in this area.

Over the long run, a bed and ISA can boost an individual’s overall returns on a net basis. That’s especially the case for people who have been investing for a substantial period of time and have a relatively large portfolio .

Potential costs

Of course, whenever shares are sold and then bought back their price can change between the two transactions, resulting in loses or gains. Since shares all have a bid/offer spread, the chances are that the sale price will be lower than the repurchase price. Commission charges are also likely to add to the cost of the transactions.

Shares held outside an ISA are subject to capital gains tax; there may, therefore, be a tax payment to make. Each year, an individual has a capital gains tax allowance of £12,000. If the realised gains from the combined sale of shares during a tax year exceed this allowance, capital gains tax on the balance at 10% for basic-rate taxpayers and 20% for higher-rate taxpayers is due.

My verdict is…

The process of selling shares held in a sharedealing account and repurchasing them within an ISA is not without risk. An investor may sell at a lower price than the repurchase price, incur commission costs, and pay taxes on any realised gains.

However, ISAs offer significant tax advantages over the long run, which could more than offset the costs. As such, undertaking a ‘bed and ISA’ could be a sound strategic move for long-term investors.

Editor’s note: A previous version of this article listed the prior year’s capital gains allowance and outdated capital gains tax rates. This has been updated. We regret the error.

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