With stock markets on the slide, should you invest in shares? The FTSE 100 dropped below the 7,000 floor last week and is struggling to recover. It doesn’t look very inviting.
It could be a buying opportunity but not everyone has the stomach for that. One alternative is to use the downturn to have a tidy-up of your portfolio instead. Do you have shares or funds outside an Isa? This is the perfect time to get them under the Isa umbrella and sheltered from further tax. Annoyingly though, you will have to sell them to get them into the Isa. You can do this and immediately buy them back with a process called ‘Bed & Isa’.
I haven’t got any new money for Isas this year so I’m doing Bed & Isa instead. I have shares in the Witan investment trust which I bought about 15 years ago, both as a lump sum and through a few regular contributions. Then I forgot about it. Imagine my surprise when I looked at it a few months ago and saw that it was worth more like tens of thousands.
This is a lovely problem to have but why oh why did I not put these shares in an Isa back then? Because I have to sell them to get them inside an Isa now, I’m going to net myself a capital gains tax bill over and above my £11,500 exemption for this year.
I’m damned if I’m going to let HMRC get its sticky hands on my hard-earned savings so I’m splitting the Bed & Isa over a couple of years. This way I can make the most of my Isa allowance while remaining within my capital gains exemption. Because of that, I couldn’t use up my full Isa allowance. Fortunately I found some cash in an old Virgin account and threw that into this year’s Isa too.
If markets (and your shares) sink, this actually helps you with Bed & Isa because your investment is now worth less and you can get more of it covered by the Isa allowance than when the market was high. You also have less capital gains to pay. And, because you immediately buy back the shares, you don’t crystallise (that much of) a loss.
Then you just have to wait for the market to go back up. When it (normally) does, all your lovely gains will be free of further income or capital gains tax. That’s why it’s so important to use your tax-free allowances every year because over time, those investments, which may be small when you start, can really add up.
If you’re super-nervous about shares, at least get as much cash into the Isa as you can to fulfil your allowance. You can always shift it into shares later. The same goes for Junior Isas and pension top-ups. Be aware that the end of the tax year is approaching (5 April) and you need to get your skates on. Use those allowances by then or lose them forever!
See the SMM guide to Isas for beginner investors here.