Investing for children and grandchildren

Junior ISAs’ are now available, to provided tax-exempt savings accounts for children and young people who do not have a Child Trust Fund.

To begin at the beginning, Child Trust Funds were opened for babies born between 1 September 2002 and 2 January 2011 (both days inclusive). Each account was opened with a contribution from the Government (usually £250), but family members or other well-wishers could (and still can) provide further money to add to the account. The total amount which may be invested in an account in the current tax year (2011/12) is £3,600, and the same limit will apply next year.

Junior ISAs are very similar, except that there will be no contribution from the Government. They may be opened both for children and young people born before September 2002 and for babies born after 2 January 2011. Again, the investment limit for both this year and next is £3,600.

At first sight, the tax exemption is of limited value, since the child or young person would be unlikely to have enough income to be liable for tax anyway. However, investment in a Child Trust Fund or Junior ISA avoids the usual rule, that interest on money given by a parent counts, for tax purposes, as the parent’s income, until the child’s eighteenth birthday.

Also, contributions to a Child Trust Fund or Junior ISA may be a convenient way for grandparents to make gifts within their annual inheritance tax exemption.

Who’s holding the money?

From age 16, the young person can manage the account him- or herself – that is to say, can decide how and where the money is to be invested. No withdrawals are permitted until the young person’s eighteenth birthday, but on that day the account becomes his or hers to spend or save as he or she will – there is no way the money can be ring-fenced for spending only in ways the parents approve.

Given that maximum savings over 18 years could produce a fund of £70,000 or more, this may be a significant consideration, but it will be for each family to decide whether tax savings or continuing control over the money are more important. It may be that a halfway house may be most appropriate – some savings in a Junior ISA and others in earmarked accounts in the parents’ names.