As a parent, guardian or grandparent, you’ll want to provide the best future for your children or grandchildren that you can. Christmas and birthdays are an excellent time to encourage children to start thinking about the value of money. Many children have hundreds of pounds spent on them either at Christmas or on their birthdays. But could that money be put to better use? Rather than buying yet more toys for them, consider setting them up a tax-efficient Junior ISA, an Investment Account or even a Pension.
Today’s kids are likely to need thousands of pounds to get them through university and onto the property ladder. Investing for their future, to help with some of these expenses later on in life, is well worth considering.
Junior ISAs (JISAS)
A JISA is a tax-efficient children’s savings account where you can make contributions on the child’s behalf. Any gains do not incur Capital Gains Tax and they will not be considered part of the parents’ or grandparents’ estate for Inheritance Tax purposes. If the investment is allowed to grow, it could build up into a sizeable sum. The money could then be given to the child as an adult. Depending on the amount invested, the capital may be enough to cover tuition fees and possibly board and lodging as well, or a deposit for their first property.
You, as the child’s parent or legal guardian, must open the Junior ISA account on your child’s behalf. Money in the account belongs to your child. They can’t withdraw it until they turn 18, apart from in exceptional circumstances. They can, however, start managing their account on their own from age 16.
There are two types of JISAs:
- Junior Cash ISAs – these are essentially the same as a bank or building society savings account. Junior Cash ISAs come with one big advantage: your child doesn’t have to pay tax on the interest they earn on their savings. You don’t have to pay any tax either.
- Junior Stocks & Shares ISAs – With a Junior Stocks & Shares ISA account, you can put your child’s savings into investments like shares and bonds. Any profits you earn by trading shares or bonds are tax-efficient.
What is the limit on a Junior ISA?
The Junior ISA limit is £9,000 per tax year. If you put more than this into a Junior ISA, the excess will be held in a savings account in trust for the child. It cannot be returned to the donor. Parents, friends and family can all save on behalf of the child as long as the total stays under the annual limit. No tax is payable on interest or investment gains.
When the child turns 18, their account is automatically rolled over into an adult ISA. They can also choose to take the money out and spend it how they like.
Pension for your child
A pension is one of the greatest gifts you could give your child. Even though their retirement seems far away, investing in a pension for your child could help you to pass on your wealth without creating Inheritance Tax liabilities. Children’s pensions benefit from the same advantages as adult pensions. That means the pension fund benefits from tax relief on contributions along with the tax advantages of the fund.
Childen’s Investment Account
For tax reasons, this approach may best be suited to grandparents. If you are a grandparent, you can set up a designated account for your grandchild and invest a capital sum in it. The account remains under the full control and ownership of you as the grandparent. Any income and gains taxed as your own.
It’s your choice to decide when the account can be gifted or assigned to the child. Where this occurs, the grandchild is legally entitled to the money at age 18 and can use it as they see fit. This could be for university fees, a deposit for a house or a first car. The transfer of ownership of the monies would be treated as a Potentially Exempt Transfer (PET). The value of the gift will be outside the grandparent’s estate after seven years.
Want to find out more about tax-efficient children’s savings?
We can help you to identify the most tax-efficient way to save money for your children’s or grandchildren’s futures. Contact our Wealth Planning team on info@ellacottswealth.co.uk or call 01295 250401 or contact us here and we will get back to you.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
