Tax year opportunities for children
For many, the start of the new tax year is a time for planning how to make the most of a new set of tax wrapper allowances.
And certainly under current conditions, it’s a welcome relief to come back to a familiar routine.
Looking back to Spring Budget 2020, I want to pick out one change to wrapper allowances in particular and highlight a couple of opportunities.
The change I’m referring to is the increase in the annual subscription allowances for Child Trust Funds (CTFs) and Junior ISAs (JISAs).
In what was perhaps the biggest boost to savings allowances in the Budget – certainly in relative terms – the annual subscription allowance for these accounts more than doubled, with both going from £4,368 to £9,000 with effect from 6 April 2020.
Given that, since 2011/12 (the year JISAs were introduced), the allowances have only gone up in line with inflation, this is a significant increase.
With that in mind, it’s worth remembering there are a couple of quirks in the rules for these accounts if you’re helping clients make investments for their children.
And when you leverage these quirks with the higher allowances, it creates a couple of interesting tax wrapper opportunities.
JISA to adult ISA
The first relates to JISAs and adults ISAs in the crossover 16–18 age bracket.
JISAs can be funded up until the child’s 18th birthday. But from their 16th birthday, children can also pay into an adult cash ISA. Therefore, it’s possible to fund a JISA and a cash ISA in tandem, paying in £29,000 each tax year.
This means that for the three-tax-year period starting from the tax year the child turns 16, they could pay close to £90,000 into their ISAs alone.
At age 18, the JISA would be converted into an adult ISA. The child could choose to keep the converted JISA and the adult cash ISA separate or transfer one to the other. Or they could transfer up to £4,000 into a Lifetime ISA and receive a Government bonus of 25%.
CTF to JISA
There is also a funding opportunity for clients whose children have CTFs. And for those thinking about transferring a CTF to a JISA in the next few months, it’s worth revisiting the rules around the allowances.
The key point here is that CTFs and JISAs are completely separate wrappers with their own limits. Furthermore, while they mirror each other in terms of the annual subscription allowances, they follow different subscription years.
With a JISA, the subscription year runs in line with the tax year. With a CTF, by comparison, the subscription year starts on the child’s birthday.
Therefore you could make two subscriptions to a CTF either side of a child’s birthday, then transfer the CTF to a JISA and subscribe straightaway to the JISA.
With the new limits, this means a client could squirrel away £27,000 into a tax-free wrapper for a child in a matter of months.
Clearly these funding opportunities require a large amount of free capital. But while we are in the midst of a challenging situation economically, there may be cheap investment opportunities out there that clients and advisers will be looking to take advantage of.
Meanwhile, the rules for CTFs, JISAs and ISAs look attractive in terms of allowing parents and children to roll up those investment opportunities in a tax-free environment.This article was previously published by FT Adviser