Despite the name, a bed and ISA doesn’t have anything to with opening an ISA as you sleep.
It refers to a pair of transactions that investors use to move their portfolio into a stocks and shares ISA - that’s an ‘individual savings account’ for anyone unfamiliar with the acronym.
In one transaction, an investor will sell some stocks in a regular brokerage account. At exactly the same time, they’ll try to buy the same stocks back in a stocks and shares ISA.
Even though it’s probably fun trying to buy and sell stocks simultaneously, people don’t make bed and ISA transactions just for kicks. The reason they do it is because of the rules governing ISAs.
You can’t transfer stocks that you already hold in a regular brokerage account into an ISA. To get the tax benefits that come with an ISA, you have to deposit money into one and then invest it.
That means anyone who holds stocks and shares in a regular brokerage account will have to carry out bed and ISA transactions if they want to move them into an ISA.
Check our stocks and shares ISA page to see how you can open an ISA with Freetrade.
Even if you managed to buy and sell your stocks at exactly the same time, performing a bed and ISA transaction will cost you some money. There are a few reasons for this.
First of all, buy and sell prices are different. A company that buys stocks from you will only sell them back to you at a higher price. That’s how they make money.
The next cost is stamp duty. You won’t pay this when you sell stocks but you do have to pay the 0.5 per cent tax as a buyer.
If you use a broker that charges you trading fees or any other commissions, you’ll also have to pay those too.