As parents, we want the best for our children, and it’s natural to want to give them a head start in life.
One of the most popular ways of doing this is to invest in a Junior Individual Savings Account (JISA), so they can benefit from the tax-free advantages of saving and investing.
The current annual tax-free allowance for JISAs is £9,000 and JISA accounts are available to children under the age of 18. However, there are some quirks in the rules that not all parents are aware of and can allow children to build up a significant pot of savings on top of the usual ISA allowance.
The first quirk in the rules is that children aged 16-17 also qualify for an adult ISA, meaning that during the two tax years before they turn 18, it’s possible to contribute both the £9,000 JISA allowance and the normal £20,000 ISA allowance in the child’s name, both of which remain tax-free.
Secondly, Child Trust Funds (CTFs) have the same £9,000 tax-free allowance that applies to JISAs. However, whilst the rules dictate that a child cannot have a JISA if they already have a CTF, existing funds in a CTF can be transferred into a JISA without it impacting the annual JISA allowance.
Thirdly, the fact that CTFs operate on a child’s birthday year as opposed to the tax year dates (April 6th – April 5th), gives rise to a potential one-off planning opportunity.
Here is a theoretical example to explain how the CTF rules can be navigated…
A child with a birthday on 30th January can receive a CTF contribution of £9,000 on 29th January. As the allowance runs per birthday year, they can also contribute a further £9,000 on 31st January – the day after their birthday.
The child’s parents can then transfer the full balance of the CTF into a JISA in the child’s name. This process may take a few weeks to complete. Once the JISA is open and the CTF has been closed parents can then maximise the JISA allowance by investing a further £9,000 before 5th April. Then, come the start of the new tax year on 6th April, a further £9,000 can also be invested.
The above example shows that it can be possible to combine the quirks in the rules to effectively invest a total of £36,000 during only a few months, creating a significant boost to a child’s savings.
Unfortunately, due to the processing timescales of transferring a CTF to a JISA, children with a birthday in late March / early April are likely to miss out on the full £36,000 available.
It is also worth bearing in mind that the money must remain in the child’s name and cannot be withdrawn until they reach the age of 18.
With the right advice, there are certainly opportunities to give children’s savings a financial boost. At Gresham Wealth Management, we can help you to understand the different types of investments for children, advising on how best to plan and save for your child’s future. Get in touch today to find out how we can help.