This article outlines how Junior ISAs work as well how they can be used for long-term wealth planning. It should be useful for anyone considering gifting money to a child - whether as a Christmas present or otherwise.
It is not intended to be financial advice specific to your unique circumstances.
What is a Junior ISA?
Just like a regular ISA, it is an account within which no taxed is applied on income nor capital gains. As with regular ISAs, there are Cash JISAs and 'Stocks and Shares' JISAs. The former is like a tax-free bank account while the latter is also tax-free but is typically used to buy investments like funds and/or shares in companies.
A Junior ISA can be opened for anyone under the age of 18. Up to £9,000 per year can be deposited into it: so that's £9k per year per child. It is reasonable to think that a JISA that receives the maximum contributed each year will be worth more than £200,000 by the child's 18th birthday - that is a lot !!
Some key points to consider are:
1. The money cannot be withdrawn until the child is 18 years old, so it is not appropriate for money that is earmarked for use before then (for example, for school fees).
2. The child obtains full control of the money on their 18th birthday. Hopefully your 18-year old will recognise the benefit of rolling it into an adult ISA, using it as a deposit on a flat or doing something else sensible with it - but there is nothing legally stopping them from blowing it all on one heck of a Freshers Week.
Note: there are other ways to tax efficiently plan for school fees, including for money that is being gifted from relatives like grandparents. Read our School Fees piece for more details.
Second note: if the prospect of your child having control of their JISA funds once they turn 18 is a little scary then there are others to save tax efficiently that maintain more control over when the funds are disbursed. It typically makes the most sense if you are starting with a lump sum of at least £50,000, though that's not strictly necessary. We haven't written an article on this yet - but feel free to contact us for more info (all consultations are free of charge).
Interest rates are better than a regular bank account and your child's savings won't be subject to investment risk. This may be useful if the timeframe for the savings is relatively short-term: for example if your child is within a few years of their 18th birthday and the money is earmarked for university costs. This MoneySavingsExpert article lists the Cash JISA providers with the highest interest rates: https://www.moneysavingexpert.com/savings/junior-isa/.
Stocks and Shares JISA
Historically, stocks have outperformed cash savings over the long term. Therefore, if your child is young and/or not going to need this money for many years then it makes sense to consider a 'Stocks and Shares' JISA. We would be delighted to manage a JISA for your child but unfortunately we can only help when the 'registered contact' (e.g. a parent) is a client or becomes a client of ours at the same time.
Below are some options for Stocks and Shares JISAs if you would like to explore handling this yourself:
A Final Word on Tax Efficiency - Inheritance Tax
Due to potential inheritance tax of 40%, the transfer of wealth between generations is really quite heavily taxed in the UK. However, there are many strategies available to families that can minimise inheritance tax (you can read more here). One of the simplest is to simply give away money to younger generations; as long as the donor lives for longer than 7 years from the time of the gift then it is free of any inheritance tax.
With that in mind, wealthy grandparents might consider contributing £9,000 to their grandchild's JISA each year. The accumulated savings could eventually be used to, say, fund the child's first property purchase and the gift would, subject to the 7-year rule, be free of inheritance tax. When you consider the tax advantages of the JISA, the adult ISA into which the JISA could be rolled and the inheritance tax savings, it is truly one of the most tax efficient means of transferring wealth between generations.
If you would like to learn more
If you simply want to open a JISA, we provide a number of ideas above. To be clear, we are not 'recommending' any of them - but hopefully the information is helpful.
If your affairs are a bit more complicated then please do contact us. Every consultation is free of charge and most people learn something even if they do not become a client. There are various ways in which your family can transfer wealth tax efficiently between generations; we would be delighted to help you find the ways that make the most sense for your particular circumstances.
And finally, all the very best for the holidays and for the New Year !