Making the most of tax wrappers for children

For clients looking to put money aside for their children, there are interesting tax wrapper opportunities out there. Martin Jones looks at two of them.

I’m always staggered when I see calculations for compound growth. This is especially true when the investors are children, given how long their investment horizon might be.

And the more your clients can squirrel away tax-free early doors for their children and grandchildren, the greater the compounding effect will be over time.

With that in mind, here are two ways your clients can get their kids’ investments off to a flying start.

Junior ISA to adult ISA transition period (ages 16 to 18)

Under current rules, a junior ISA can be opened for a child up until their 18th birthday. The subscription allowance is £9,000 per tax year.

As soon as they turn 18, the child can also open an adult stocks and shares ISA and start taking advantage of the £20,000 adult subscription allowance.

However, it’s worth remembering that they can open an adult cash ISA from their 16th birthday. And because it’s an adult ISA it gets the full adult allowance of £20,000.

What’s more, a child can hold an adult cash ISA alongside a junior ISA whilst they are under 18 and have money paid into both at the same.

This means a total of £29,000 can be paid into their ISAs in a single tax year. This can also be repeated in the tax years they turn 17 and 18, meaning total tax-free savings of £87,000 in under three years.

Tax year 1

Pay £9,000 into junior ISA
-- Child turns 16 --
Pay £20,000 into adult cash ISA

Tax year 2

Pay £9,000 into junior ISA
Pay £20,000 into adult cash ISA

Tax year 3

Pay £9,000 into junior ISA
-- Child turns 18 –
Pay £20,000 into adult cash ISA or adult stocks and shares ISA

Child Trust Fund to Junior ISA

While child trust funds (CTFs) were closed to new applications in 2011, there were still a staggering six million of them in April 2020.

Meanwhile in 2015, the transfer rules were relaxed to allow parents to transfer CTFs to junior ISAs, and many clients have taken advantage of this.

If you have clients with old CTFs that they’re looking to transfer, it’s worth asking they whether they want to pay anything into the CTFs first.

Like junior ISAs, CTFs have their own annual allowance of £9,000. Unlike junior ISAs, however, the CTF allowance starts on the child’s birthday rather than on 6th April.

This means it’s possible to pay in a total of £27,000 in a very short period around the child’s birthday.

This consists of two payments of £9,000 to the CTF, then a payment of £9,000 to the junior ISA once it’s transferred, as the junior ISA allowance is separate to the CTF allowance.

Pay £9,000 into the CTF
-- Child’s birthday –
Pay £9,000 into the CTF
-- Transfer CTF to junior ISA
Pay £9,000 into the junior ISA

A small word of caution. With this opportunity, it’s important that the payments go to the CTF first, and the CTF is transferred in full, as it’s not permitted to pay into a CTF and a junior ISA at the same time.

This article was previously published by Professional Adviser