Junior ISAs: a Welcome Boost

Posted on March 14, 2020

Updated April 2020 to reflect current tax allowances

A Junior ISA is a tax-efficient way to build up capital for when a child reaches adulthood, giving them the chance to take some responsibility for their own finances.

Given current life expectancy, if everybody just handed down their family wealth to the next generation at death, most people would not receive the financial boost of an inheritance until they were well into middle age, and HMRC would have the opportunity to collect IHT from every generation.

It’s not unusual for people to skip a generation with their bequests, so that grandchildren benefit at a younger age and HMRC are denied a full, juicy bite of the IHT cherry from the the estate of the departed.

Spare a thought for ‘those kids today’

Current generations face a barrage of financial challenges that those who came before them did not: tuition fees and far higher house prices are the two most notable.

The children of today must provide for their own eventual pensions whilst also threatened, as future taxpayers, with the ever-growing cost of paying for public sector pensions and medical and care for a longer-living older generation that already holds a lot of Britain’s private wealth.

Buying a home is a really big issue: first-timers often have little hope of getting their foot in the door unless their parents are able to help with a major contribution to their kids’ deposit.

A will is not always the only or best way to pass on wealth

Everyone has to consider their own financial needs in old age but, for many people, the problem is not parting with money for the family but the best way to do this.

With this in mind, it’s important to recognise that a will is not the only way to help younger members of the family at important times in their lives. Indeed, the government themselves have provided a way to take gifts to younger family members out of any IHT calculation.

Junior ISAs were launched in November 2011 as the successor to Child Trust Funds. CTFs included contributions from the Exchequer, a benefit that Junior ISAs do not enjoy, but the new savings ‘wrapper’ does allow annual deposits to be made in cash or in purchases of equities and other assets, and these accounts come with various tax breaks similar to other ISAs.

If a person is already the beneficiary of a Child Trust Fund then the contents must be transferred over to a Junior ISA when opened: it is not permitted to have both.

Opening an account

To open a Junior ISA account you must be either the parent or parental guardian of the child concerned, but anyone can contribute funds.

As the word ‘Junior’ would suggest, only those under the age of 18 can be named on the account, and the child must also be living in the UK (although once the account is opened, they move abroad). There are also exceptions to the UK residence rule for the armed forces, and diplomatic and civil services.

No need to choose between Cash and Stocks & Shares

The child can have two types of Junior ISA: Cash and Stocks & Shares. As with other ISAs, there is an annual limit to the payments made into the combined pot (for the tax year 2020/21 it is £9,000 – a massive increase on the 2019/20 allowance of £4,368).

In common with their adult counterparts, there is no tax on interest earned on cash savings, and there is no tax on share dividends or other returns or any capital growth (or rise in the value of the assets held through the Stocks & Shares ISA).

Once the child reaches 16 years of age he or she can:

  • open (and administer) his or her own Junior ISA accounts;
  • also open an adult Cash ISA or Help To Buy ISA;
  • and be entitled to the full amount of the separate ISA allowance (£20,000 for 2020/21).

However the child cannot:

  • make cash withdrawals from a Junior ISA account until he or she is 18;
  • make transfers between Junior and other types of ISA accounts until he or she is 18.

The extra benefits available for 16 and 17 year olds in the form of access to both sets of tax-free savings allowances enable parents and other family to give a young person that much-needed helping hand.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS, WHICH ARE SUBJECT TO CHANGE. THE TAX BENEFITS RELATING TO ISA INVESTMENTS MAY NOT BE MAINTAINED.

STOCKS & SHARES ISA INVESTMENTS DO NOT INCLUDE THE SAME SECURITY OF CAPITAL THAT IS AFFORDED WITH A CASH ISA. THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

No guarantee can be given that the information provided is accurate in the present or the future. It is not intended to constitute either a statement of applicable law or financial advice, and responsibility cannot be accepted for any subsequent loss following activity or inactivity by any individual or organisation. Indeed, such information should NOT be acted upon without first receiving appropriate and specific professional advice.