Investing in your child’s future

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.

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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 open.

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.

Junior pensions

Turning to pensions now and the option of setting up a scheme for a child.

This is definitely one for the long game, and primarily used by wealthy clients who have exhausted the Jisa allowance for their offspring.

It is 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.

As a 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.

It would 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.  

Another use 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.

Bare trust investment accounts

A child 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.

Unlike the other type of accounts we have looked at, a bare trust does not have to be managed by the child’s parents.

They are 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 appropriate.

On turning 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.

The trustees 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.

Income and 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 £12,000.

One crucial 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.