For clients wanting to invest for their children’s future in something more adventurous than a child savings account, there are three main options: a Junior Isa, a Junior pension or a Bare Trust investment account.
The purpose of these accounts varies significantly, and there are considerable differences in how they can be accessed, tax treatment, limits on investments and how the accounts are managed.
Jisas are often the first option that
springs to mind when we talk about investing for children. Like all Isas, Jisas
benefit from tax-free growth, with no income or capital gains tax to be paid.
This includes when the account is
funded by parents, and, unlike some other accounts, even when the income for
the year exceeds £100.
Children can have a cash Jisa and a
stocks and shares Jisa. It is possible to hold one of each type, and transfers
can be made freely from one to the other.
However, unlike adult Isas it is not
possible to open a new account of the same type each year and leave the old one
If a stocks and shares Jisa is held
and you want to pay into one with a different provider then the existing Jisa
must be transferred to them first.
Accounts can be opened by the parent
or legal guardian of any child resident in the UK aged under 18.
Remember that children born in the UK
between September 1 2002 and January 2 2011 were eligible for child trust funds
and although these accounts can no longer be opened they can continue to be
held until the child reaches age 18.
It is not permitted for a CTF and a
Jisa to be held for the same child, however since April 2015 it has been
possible to transfer a CTF to a Jisa if the transfer is made as part of the
Jisa account opening process.
Subscription limits for both Jisas
and CTFs are £4,368 for the 2019-20 tax year.
pensions now and the option of setting up a scheme for a child.
definitely one for the long game, and primarily used by wealthy clients who
have exhausted the Jisa allowance for their offspring.
possible to pay in £2,880 a year, which will be topped up to £3,600 under
relief at source, even when there are no earnings.
registered pension scheme, the investments can grow tax-free and the benefits
of compounding will be substantial, given the funds cannot be accessed for a
time frame of potentially 50 year or more.
usually be the parent or legal guardian who would set up the pension and make
the investment decisions, but some providers may allow grandparents or other
adult family members to do so.
for junior pensions is where a child is a beneficiary after a family member’s
death and has funds designated to flexi-access drawdown in their name.
trust investment accounts
cannot legally own shares, so the easiest way to open an investment account for
them is to have a bare trust account.
A bare trust
document can be very simple, setting out the initial donor, trustees and who
the beneficiary is.
other type of accounts we have looked at, a bare trust does not have to be
managed by the child’s parents.
therefore a popular option for grandparents setting up accounts for the benefit
of their grandchildren that they can invest and manage.
Bare trusts also
allow withdrawals at any age, as long as it is for the beneficiary’s benefit,
so grandparents could invest and make withdrawals to pay school fees as
age 16 (18 in the rest of the UK) the child-turned-adult has absolute
entitlement to all the capital and income, but it is not an automatic handover
to take over managing the assets.
can continue looking after the fund indefinitely, but what changes is the
now-adult beneficiary can demand the capital and/or income at any time. If they
are comfortable looking after their own affairs then the trust effectively ends
and it becomes an adult investment account.
As it is not
a tax wrapper like a pension or Isa, there is no limit on the amount that can
be invested in a bare trust account.
capital gains within the account are chargeable to tax, but are treated as
belonging to the beneficiary.
A child has
the same personal allowances as an adult, that is personal allowance, personal
savings allowance and a starting rate for savings of 0 per cent, meaning up to
£18,500 of income a year could be tax free plus a capital gains allowance of
point to be aware of though is that if a parent puts money into the bare trust
account and the income exceeds £100 a year (or £200 if both parents pay in),
then the income is taxed on the parents.
This is why bare trust dealing accounts are most commonly used for grandparents to make gifts, rather than parents.
If you would like more information on any of the above options, please give us a call.