One of the many things that the coalition Government introduced in its emergency budget held on 22nd July 2011 was the cessation of government contributions to Child Trust Funds (CTFs) for all children born after 2nd January 2011. 

CTFs were originally introduced by the Labour in September 2002 as a vehicle to encourage parents to save on behalf of their children and were augmented by a limited amount of government funding.  With the abolishment of CTFs, a gap was left to fulfil the desire for families to save for their children’s future. 

This gap has now been filled with the proposed introduction of Individual Savings Accounts (ISAs) specifically for children which will be available from 1st November 2011.  Most of you will be familiar with the features of the adult variant of ISAs, which allows individuals to make annual contributions to either a Cash ISA (from age 16) or Stocks & Shares ISA (from age 18).  Once invested in the ISA wrapper the investments grow free of both income and capital gains taxes. 

Currently, if a parent makes an investment on behalf of a child and the associated annual income exceeds £100 the income is taxed as if it is that of the parent’s at his/her marginal rate.  This rule often makes investing on behalf of a child inefficient to a parent in terms of additional exposure to income tax and complex in the terms of finding an appropriate investment that avoids this additional exposure.  The ‘Junior ISA’ as it is named, could solve this problem.
Listed below are the key features:

• Available only to UK resident children aged under 18 who do not have a CTF
• The maximum allowable investment is £3,600 per tax year
• Both cash and stocks & shares Junior ISAs will be available.
• Children will be able to hold one cash and one stocks and shares Junior ISA at a time
• Any person or organisation will be able to contribute to any child’s Junior ISA
• All income and gains will be tax free.
• At the age of 18, the Junior ISA will default to being a normal adult ISA.
• Withdrawals will not be permitted until the child reaches 18, except in cases of terminal illness or death.
• From the age of 16, a child could have a Junior ISA as well as an adult cash ISA.

Important Considerations:

• Any money invested cannot be accessed until the age of 18
• At 18 the young adult takes control of the ISA and  is free to access and spend the money as they see fit.
• There is a potential exposure to inheritance tax (IHT). Any lump sum investments in a Junior ISA could be regarded as a transfer for inheritance tax (IHT) purposes and be a potentially exempt transfer if not covered by the annual exemptions available.

I have no doubt that the Junior ISA will be an ideal savings vehicle for parents to consider, especially if they are concerned about income from other products being taxed as their own.  With further education costs expected to rise further in the future a ‘pool’ of ISA funds could help take the sting out of these costs or help a child to get ‘on the property ladder’.  However, parents and grandparents should bare the three important considerations in mind before committing funds to a Junior ISA.  If you think that access to the funds on behalf of your child could be required before age 18 or you do not wish the child to have full control of the money at 18 you may wish to reconsider the investment vehicle chosen.

Please don’t hesitate to contact us if you feel you may wish to use a Junior ISA when they become available or to discuss other savings vehicles suitable for children under the age of 18.