Charles Benson, Wealth Planning
When it comes to saving for children, there are a myriad of different options available for private clients. A well-known option is the Individual Savings Account, commonly known as an ISA.
ISAs represent one of the most tax advantageous wrappers available to UK residents at present. They benefit from no Capital Gains Tax and no Income Tax (on income or dividends) whilst the funds remain invested, and the proceeds can be withdrawn without any of the above taxes being applicable. However, they are subject to Inheritance Tax.
In the UK there are currently six different types of ISAs in the UK savings space, five of which are open to new investment:
Each of these ISA types have their own rules and a specific place in the UK savings space. When it comes to those under the age of 16, the only option available is a Junior ISA (JISA).
In the 2020/21 tax year, the Junior ISA allowance was increased to £9,000 per annum making it a very attractive option for parents looking to save for their children’s future. JISAs are available until the age of 18, after which the account is converted into a full adult ISA with its own allowances.
From the age of 16 onwards, an individual can open a Cash ISA and from the age of 18 onwards, an individual can open a Stocks and Shares, Lifetime or Innovative Finance ISA. At present, the ISA allowance is £20,000 per annum for individuals.
Therefore, there is an opportunity for an individual between the ages of 16 and 18 to open a Cash ISA alongside their existing Junior ISA. The Junior ISA allowance sits independently from the core £20,000 ISA allowance, meaning an individual can subscribe the maximum £9,000 to their JISA and the maximum £20,000 to their Cash ISA, resulting in a £29,000 effective ISA allowance in these tax years.
In the year that the individual turns 18, the rules are broadly the same, but the timing of the contributions needs to be considered. Using an example where an individual turns 18 on a Wednesday, on Monday morning they could subscribe £9,000 into a JISA, on Wednesday the individual turns 18, and then on Friday they can subscribe a further full £20,000 to the Stocks and Shares ISA. Please note, after the individual has turned 18 they cannot make a JISA subscription. The infographic below is a useful guide:
In the event that an individual commenced ISA and JISA contributions at the age of 16, it is therefore possible to contribute the following:
With interest rates at historic lows, the rates payable on Cash ISAs at present are not overly attractive for those looking for a long-term return in excess of inflation. At the age of 18, the individual could transfer their Cash ISA to a Stocks and Shares ISA, resulting in an £87,000 Stocks and Shares ISA. A Stocks and Shares ISA allows access to the investment markets and therefore the potential for an inflation-beating return on capital.
ISAs represent one of the most tax effective wrappers in the UK savings space and should always be considered by parents looking to put money away for their children’s future. The planning outlined here is one of several different options available to UK investors and is a good example of how a better understanding of the system as a whole can result in beneficial outcomes in the future.
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