Building wealth for a solid financial future.
As a parent, guardian or grandparent, you’ll want to provide the best future for your children or grandchildren that you can. Christmas is an excellent time to encourage children to start thinking about the value of money. Many children have hundreds of pounds spent on them at Christmas, but could that be put to better use? Rather than buying yet more toys for your children or grandchildren, why not consider setting up a tax-efficient Junior ISA for them?
With today’s kids likely to need thousands of pounds to get them through university and onto the property ladder, a Christmas gift that will help with some of these expenses is well worth considering.
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.
Junior Individual Savings Account (JISAS)
A JISA is a tax-efficient children’s savings account where you can make contributions on the child’s behalf, subject to an annual limit. 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.
Nevertheless, the child will automatically get access to the money when they turn 18 and can choose what to do with it.
There are two types of JISA – a cash JISA and a Stocks & Shares JISA:
- Junior Cash ISAs – these are essentially the same as a bank or building society savings account. But Junior Cash ISAs come with on big advantage: your child doesn’t have to pay tax on the interest they earn on their savings, and you don’t have to 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
A child’s parent or legal guardian must open the Junior ISA account on their behalf. Money in the account belongs to the child, but 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.
The Junior ISA limit is £4,260 for the tax year 2018/19. If more than this is put into a Junior ISA, the excess is 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 into an adult ISA. They can also choose to take the money out and spend it how they like.
A pension is one of the greatest gifts you could give children this Christmas. Children’s pensions benefit from the same advantages as adult pensions. That means the pension fund benefits from the favourable tax treatment, in terms of tax relief on contributions along with the tax advantages of the fund.
For tax reasons, this approach may be best suited to grandparents. A grandparent can set up a designated account for a grandchild and invest a capital sum in it. The account remains under the full control and ownership of the grandparent, with any income and gains taxed as the grandparent’s own.
When the grandparent deems appropriate, 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 – which may not necessarily be for education purposes. 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. Many parents and grandparents want to set up their children or grandchildren to enjoy a secure financial future. Yet paying down student debt is not necessarily the best option if they have a spare capital sum to invest. They could also consider helping their children or grandchildren to save towards a deposit for a property or start a pension for them so that they have security in later life.
Give a festive financial gift this Christmas
Time is a powerful ally of all investors, so where you are investing on behalf of your children, you start with a great advantage – the power of compounding as profits are re-invested year on year. If you would like to discuss the options available to you, please contact one of our independent financial advisers here.