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Junior ISAs worthwhile?

Kids | Child Trust Fund

By Justin Modray, published 31 March 2011.
Helpful? 10

The Government has today announced that Junior Individual Savings Accounts (ISAs) will have an annual contribution limit of £3,000.

Junior ISAs, to be introduced from 1 November 2011, will allow savings and investment to be held tax efficiently by children until they reach 18. Full details are yet to published, but it looks like they'll be pretty similar to conventional ISAs in terms of what can be held and transfers between providers.

Will they be worthwhile?

If you are going to save for your children anyway then probably yes. Chances are savings rates will generally be competitive and it avoids any potential tax issues. Will Junior ISAs encourage more people to save for their children's future? I doubt it, too many of us are failing to save enough for our own futures, let alone our children's.

The only potential downside of Junior ISAs versus some conventional child savings and investments is that the money cannot be touched until the child is 18. Maybe this is a plus as it removes the temptation to spend the money meanwhile, but sometimes flexibility can be useful.

Will they offer tax savings?

Potentially and, if nothing else, they'll certainly make things simpler.

Children enjoy the same personal income tax allowance as adults, currently £6,475 and rising to £7,475 from 6 April as well as the same annual capital gains tax allowance, £10,100 rising to £10,600. So will they pay tax in practice? probably not.

However, it's not that simple. If parents gift money to their children and the resulting annual income exceeds £100 per child per parent then it's taxable as the parent's. not the child's.

And because children are unable to own shares and investment funds before they're 18, it's usual for a parent/grandparent to hold them on the child's behalf in a 'designated account' until they're 18 or gift them into a 'bare trust' for the child.

When investments are held in a designated account they remain owned by the adult until the child reaches 18 (when the adult can pass them over, if they wish), so the adult is liable to tax meanwhile anyway, i.e. not possible to save tax by using the child's allowances.

Investments held in a bare trust are taxable as the child's, as the adult no longer has any rights over the shares, but the £100 rule mentioned above still applies.

So while it's already possible to save tax efficiently for a child, Junior ISAs should make tax matters much simpler.

As with existing ISAs, interest and gains will be tax-free while dividends will effectively be paid net of basic rate tax which cannot be reclaimed. So unlikely to be any tax saving ion the latter.

What if my child already has a child trust fund (CTF)?

Then as things stand the new rules don't make much sense, as your child won't be able to have a Junior ISA. This means the annual tax-efficient saving/investment allowance will be capped at the annual £1,200 CTF limit rather than the £3,000 Junior ISA limit. Plus there are likely to be a wider range of Junior ISA providers to choose from versus CTFs.

I hope the Government increases the CTF annual limit to £3,000 too or, even better, simply merges CTFs into Junior ISAs to make things simpler all round.

How much might a child build up by the time they're 18?

Here's a table with a few estimates and use our Junior ISA Calculator to get a clearer idea of how much your child might accumulate by the time they're 18.

Monthly Saving3% Annual Return6% Annual Return
£25 £7,138 £9,570
£50 £14,276 £19,140
£100 £28,552 £38,280
£200 £57,104 £76,560
£250 £71,380 £95,703
Assumes monthly saving over 18 and annual returns are after charges.
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Readers' Comments (2) - To post a comment please register or login .

Comment by simonspeakeasy at 1:38pm on 01 Apr 2011:

My daughter is 11 and this looks like a tax efficient way of saving up for university costs.
Or is there a better way?

Comment by justin at 9:03am on 04 Apr 2011:

As long as Junior ISA providers offer the same range of investments as existing ISAs and don't charge for the ISA 'wrapper' then yes, this route will probably be the best way. It simply means you save/invest as normal but without any tax hassle or complications. Obviously, the key decision will then be the savings accounts/investments you choose to hold within the Junior ISA.