Using ISAs to support wealth transfer across generations

One of the most straightforward ways families use ISAs is to save for children and grandchildren. Junior ISAs (JISAs) allow money to be set aside for a child until they turn 18, at which point the account automatically becomes an adult ISA in their name.

Parents, or the child’s legal guardian, must open the JISA but grandparents and other family members can also contribute. For some, this becomes a practical alternative to ad-hoc gifts, allowing a pot to be built up gradually for future costs such as education, a first home, or simply to give a young adult a financial head start. However, it is important to remember that when the child becomes an adult they have full control of the funds to use as they see fit. Contributors to the JISA would not be legally able to influence this. 

Once children reach adulthood, gifting can continue in a different form. Many older relatives choose to help fund an adult child’s ISA through regular cash gifts; however only the adult child can invest the cash gifted in their own ISA, a parent or grandparent would not have control over this. Over time, these contributions – however small - can build meaningful savings.

Importantly, when money is gifted into someone else’s ISA, it belongs to them and so they can choose to invest the money, or spend it on something completely different. However, the sense of ownership can help younger family members develop the type of good financial habits that will stand them in good stead.

Each family member’s annual ISA allowance is the maximum they can contribute across all ISAs each tax year, currently £20,000 per individual family member over the age of 18. Looked at individually, that allowance may feel modest. Across a family, it can be much more significant.

For a couple, that means up to £40,000 between them each year. Over a five‑year period, that could add up to £200,000 sheltered within ISAs, before factoring in any potential investment returns, which would also be free from tax. It’s still important to be mindful of investment costs and charges, as these can affect overall returns. It’s also worth remembering that ISAs held in your own name remain part of your estate for inheritance tax (IHT) purposes, and gifts over £3,000 may be included in your estate if you do not survive for seven years.

Families may also benefit from considering Lifetime ISAs (LISAs). Individuals aged 18–39 can contribute up to £4,000 per year, with the government adding a 25% bonus which is worth up to £1,000 annually. LISAs can be used either towards purchasing a first home (subject to eligibility rules) or for later‑life planning from age 60. Withdrawals for other reasons may incur penalties, but used appropriately, LISAs offer a valuable opportunity for younger family members to build long‑term savings, with the added benefit of an immediate government uplift. LISA contributions also count towards the overall £20,000 ISA allowance, adding another layer of flexibility when coordinating allowances across a household.

On top of that, children under 18 can invest up to £9,000 into a Junior ISA. And as children become adults, their own ISA allowances become available, creating further opportunities for families to collectively make use of individual allowances to shelter more assets from income tax and capital gains tax across the household.

So, it’s easy to see how spreading wealth gradually across family members can help to maximise ISA allowance use, improve overall tax efficiency, and help the family finances move towards long-term targets.

From an inheritance planning perspective, gifting cash to fund another person’s ISA can also play a key role.

Cash gifts, such as the £3,000 annual gift allowance and up to £250 in small gifts per person, may fall within annual inheritance tax exemptions. Used consistently, these allowances could help reduce the value of a donor’s taxable estate over time without the need for more complex arrangements. 

Another feature is that when someone dies, their spouse or civil partner (if they were living together at the time) can inherit their ISA savings without affecting their own allowance, giving them access to the accumulated funds at a time when finances may feel especially uncertain. It is important to have a will in place to ensure that funds are passed as intended.

It’s worth remembering that ISAs themselves do not receive special inheritance tax (IHT) treatment and will usually form part of your estate on death. Any potential IHT advantage comes from gifting the assets, rather than from holding them within an ISA. For gifts to anyone other than a spouse or civil partner, the first £3,000 each tax year may fall within the annual exemption; amounts above this typically become a potentially exempt transfer (PET), which may be brought back into the estate if you die within seven years. Where larger gifts are being made, it may also be worth considering whether the excess PET should be insured.

Meanwhile, keeping clear records of gifts, deadlines and remaining allowances is vital. As with all estate planning, it’s crucial to get good advice as personal circumstances and tax rules can change. 

One of the key things to remember is that once money is gifted, it can’t be reclaimed and the original ‘owner’ loses control over it. With Junior ISAs, children can gain control of the account at 16 though they cannot make any withdrawals until they are 18. This may influence how much is contributed and how it is invested. 

Also, while ISAs are less complex than many other types of investments, there’s always a level of risk, especially for stocks and shares ISA, as the value of your investment can go down as well as up and growth is never guaranteed.

Used well, ISAs can support intergenerational planning in a way that feels practical and familiar. If you are unsure how to make the most of the individual ISA allowances available across your family, a conversation with an adviser could help you and your family think through these issues early, explore what makes sense for your circumstances, and build a plan that grows with you. 

This article is for information purposes only. It is not intended as investment or tax advice.

Fees and charges apply at SPW.

Schroders Personal Wealth does not provide personal tax advisory and tax compliance, however we can introduce you to a relevant specialist.  Schroders Personal Wealth might receive a referral fee from some of the partners we introduce to you.

Schroders Personal Wealth do not offer LISAs or Cash ISAs.