Harvest and carry-forward your ISA allowance- 5 mins read
The old maxim that your ISA allowance is ‘use-it-or-lose-it’ in a given tax year and that there is nothing more sacred than ensuring you’ve maxed out your ISA is true, but like with all things in the UK tax system, you can work around this and effectively carry forward your ISA allowance if you aren’t able to fill it in for a given year, for whatever reason.
- You need to have sufficient liquid capital on hand, or at least the ability to borrow significant amounts of capital for at least a couple of days
- You are eligible and able to subscribe capital to an ISA for each tax year in which you want to carry the ISA allowance for that tax year forward
- You have a flexible ISA
How does this work?
In the general case of ISAs, the limit on the amount you can put into an ISA in a given year is £20k. That’s pretty simple - the ISA doesn’t care about how much that £20k grows to or how much you take out. If you put in £20k and realise you’ve made a massive mistake and take it back out the next day, your allowance has been used up for the year. You can’t put any more money into an ISA.
A flexible ISA works slightly differently, and more favourably (to the taxpayer, that is). What is a flexible ISA, you ask? In the words of HMRC:
A flexible ISA is an ISA whose terms and conditions allow the investor to replace, in whole or in part, cash they have withdrawn, without the replacement counting towards their annual subscription limit.
As an example, in the same situation above: where you put in £20k and then instantly remove it again, your remaining allowance remains at £20k - so you can put money back into your ISA with the very important caveat that you put the money back in the same tax year as when you took the money out.
Okay, you understand what a flexible ISA is. How do we actually use this to carry forward your allowance? Let’s look at the situation of a 5 year journey where you don’t want your capital sitting inside an ISA for whatever reason, but you want to reserve the option of dumping £100k at the end of the 5 years. In the typical situation, this is what we would do:
- 2018/19: £0k into an ISA, £20k outside
- 2019/20: £0k into an ISA, £40k outside
- 2020/21: £0k into an ISA, £60k outside
- 2021/22: £0k into an ISA, £80k outside
- 2022/23: £20k into an ISA, £80k outside
you’d be stuck with £80k left outside the ISA. However, if you’re happy doing some bank transfers across tax years, what you can do is this:
On 5 April 2019 (the end of the tax year), you temporarily put £20k into your ISA (remember the requirement of having sufficient capital) from a source of capital you have (e.g savings or magin). On the next day, 6 April 2020 (the start of the new tax year), you remove £20k from the ISA and put it back where you wanted it to be allocated (e.g savings or paying back margin).
Your ISA limit for that entire tax year (6 Apr 2019 - 5 Apr 2020) is now £40k. In fact, you should put in £40k on 5 April 2020 (e.g from savings or margin) and then take £40k back out on the next day, 6 April 2021 (the start of the new tax year) and put that back where you want it.
You repeat this where possible, temporarily tying up larger and larger amounts of capital (but only for a day) on the boundaries of the tax year to ensure that in each tax year, you retain the option of putting in all the previous year ISA limits.
Why would you want to do this?
There are a couple of reasons why you might want to do this:
- You want to allocate all your capital to an instrument that your ISA can’t hold, but reserve the option of putting it into your ISA afterwards. As a specific example: someone who believes that paying down their mortgage faster is providing them with a better return than the stock market (given 2022/23 interest rates, this may not be as stupid as it sounds) should have an offset mortgage in which they accumulate all their capital. They should move money in and out of that offset mortgage account on the boundary between tax years to accumulate their ISA allowance and then once the mortgage is paid off, can redirect all their money to their ISA make up for past years of not filling up the ISA.
- You’re harvesting someone else’s allowance who you’re comfortable giving them capital for a day or two but not more than that and envision becoming comfortable doing so later down the line.
The latter is the specific situation I find myself in, where I’m happy to harvest my significant others’ ISA allowance under the assumption that in the future, we’ll be combining our finances, but want to ensure that things remain seperated before then (for example before getting married v/s after getting married).
- Finding a provider that offers a flexible ISA is harder than it looks, they come with more complexity between the provider and HMRC (I presume) which is why they’re not the standard. As a starting point: Vanguard have a flexible ISA.
- The costs for doing this should be fairly minimal. The cost for the ISA itself should be negligible if you use a percentage-based fee or fee-free provider. The cost of borrowing the capital, removing it from an offset mortage account or away from savings or any other capital allocation for a day or two should be minimal, but will grow over time.
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