How families can make the best use of their combined ISA allowances

ISAs, or Individual Savings Accounts, can be an essential tool for financial planning, as they allow you to save and invest tax-efficiently. The annual ISA allowance, the amount of money you can save in an ISA each year that is exempt from taxation, has been gradually increasing in recent years. It is now at its highest ever level. For the current tax year, 2023/24, you can save up to £20,000 in an ISA .

Someone wanting to save more than this amount each year could consider doing so in tandem with a spouse, civil partner or even their children, using their ISA or JISA (Junior ISA) allowances. So ISAs can play a significant role in family tax planning, as family members can in effect combine their allowances to enhance overall tax efficiency.

ISAs and couples

Under the current rules you cannot open a joint ISA with someone else or transfer an ISA allowance, as each person has their own separate, individual allowance. Even so, each partner in a marriage or civil partnership can save independently and double the impact of their family ISA allowances, as they could save up to £40,000 in ISAs between them in a given tax year.

These savings could amount to a significant sum over time. Over five years, a couple could have invested £200,000 in ISAs. Over ten years they could have invested £400,000. And this excludes potential returns and growth on the ISA investments, although investments can go down as well as up and you may not get back your initial investment.

So ISA savings have the potential to really boost a couple’s financial planning. And they can help them save for the most significant events in life, such as bringing up children, weddings, house moves or later life care.

ISAs and bereaved partners

But ISAs have another attribute that can benefit couples. If one person dies, the surviving partner can inherit their ISAs without any impact on their own ISA investments or allowances. This means bereaved savers can use their loved one’s accumulated ISA amounts, which can help with financial planning during a very difficult time.

For example, if a husband dies with an ISA totalling £80,000 and leaves these funds to his wife under his will, she could add all of it to her own ISA. This would be in addition to her own annual £20,000 allowance, meaning she could put a combined £100,000 tax-efficiently into her ISA that year. It is important to note this rule only applies to spouses and civil partners that have passed away on or since 3 December 2014 and who were living together at the time of death.

Bed and ISA arrangements

There is another way for individuals and couples to use their ISA allowances for the benefit of their combined financial plans. This is known as the ‘bed and ISA’ arrangement and involves selling an asset, only to buy it back immediately inside an ISA. ‘Bed and ISA’ enables all future gains on the asset to be free of Capital Gains Tax (CGT). But some CGT may be incurred on the initial sale of the asset and there will also be transaction fees to consider. This can potentially be a good way for individuals and couples to fund an ISA in a tax-efficient way if they own investments but do not have cash available to pay into an ISA.

ISAs, JISAs and children

Some families may be interested in saving for their children, with JISAs in their children’s names. JISAs work in a similar way to ISAs and afford savers under 18 the same tax efficiencies. At £9,000, the annual allowance is lower than an ISA but it can still enable children to accumulate significant tax-free savings over time.

Fortunately, the children’s JISA allowance is separate from the parents’ ISA allowances. This means a parent can contribute money to their child’s JISA without using any of their own £20,000 allowance.

Let’s consider a couple who are married or in a civil partnership and have two children. They could currently save a combined £58,000 in one tax year if they were all to use their own ISA and JISA allowances. Grandparents and others can also contribute to the JISA, as there are no limits on how many people can contribute to a JISA, although the combined contributions can’t exceed £9,000.

ISAs are already well known for their tax efficiency and how they can afford individuals an easy way to help protect their money as part of a financial plan. But, as we have shown, ISAs offer savers great flexibility and clever use of allowances can help families with wider financial plans.

It is important to understand how ISA allowances are best applied to your own specific circumstances. A qualified financial adviser can assist you regarding how you and your loved ones can benefit most from ISAs and their flexibility. At Schroders Personal Wealth one of our principles is to have regular reviews with a financial adviser. This can help ensure you are well placed to make the best use of tax-efficient opportunities to help you achieve your goals.