The start of a new tax year means a fresh set of tax allowances for yourself and, if you have children, junior individual savings account (Jisa) allowances. Jisas have the same tax benefits of adult Isas, and after your child is 18 they can withdraw from them tax free. But the child has control of and access to the assets at the same age, and some parents are concerned they will not use them as intended.
This could be a lot of money. If, for example, you invest the current maximum annual Jisa allowance of £9,000 a year for 18 years, even before any investment growth this would amount to £162,000 – perhaps far more than you want to entrust to an 18 year old.
As an alternative, you could instead save into your own or your partner's Isa and give the money to your child when and how you want. Saving this way would also mean you could use it before the child turns 18, for example, to pay school fees.
Shaun Moore, tax and financial planning expert at Quilter, suggests saving into both your children’s and your own accounts. So instead of using the full £9,000 Jisa allowance you could put a smaller amount into this account, so that your child does not get control of such a large amount of money at age 18, and put the rest in your own and or your spouse’s Isas.
Your own Isa falls into your estate for inheritance tax (IHT) purposes but you can transfer it to a child without incurring IHT via a number of allowances.
If you give the money to a child under age 18 or in education to help with their living costs, this may be exempt from IHT.
You can give away £3,000 each year IHT free, or up to £6,000 if you have not fully used your previous tax year’s allowance. If both you and your spouse do this you could give up to £6,000 or £12,000 in a year to a child.
Anything over this amount counts as a potentially exempt transfer, meaning that you have to live for seven years after making the gift for it to fully fall outside your estate for IHT purposes. Otherwise the value of the gift may be covered by your IHT allowance of £325,000 if this has not been used up elsewhere.
Another option is to make gifts out of surplus income. If you can prove that you have enough income to maintain your usual standard of living you could regularly pay the excess to your child.
If you and your spouse have used up your Isa allowances, a Jisa is still one of the best options for saving for your child. If you are concerned about how they will use the money explain to them what its purpose is and involve them in decisions about it in the years leading up to their 18th birthday.
If you are looking to help a child in later in life you could invest into a junior self-invested personal pension. But they will not be able to access this until at least age 57 so cannot use it for early adult life expenses such as going to university or buying a home.
Another way to retain some control of assets you gift to children is to put them into a trust on their behalf. However, trusts can be expensive to set up, so it is probably best to turn to other options first (see 'Tax planning and the role of trusts' IC 02.10.20).
