Is a Junior ISA (JISA) a tax-free way to transfer wealth?
Is a Junior ISA (JISA) a tax-free way to transfer wealth?
A Junior ISA (JISA) may be a simple tax-free way for families to transfer wealth over time and could set your children and grandchildren up for life.
What is a Junior ISA (JISA).
Junior ISAs (JISAs) were launched in 2015 and are very similar to standard ISAs, the main difference being that they have a lower annual savings limit and are only available as either a Junior cash ISA or Junior stocks and shares ISA. Read our recent article for the full rundown on standard ISAs.
A Junior Cash ISA is simply a savings account where the interest is tax-free.
A Junior Stocks and Shares ISA is a tax free investment wrapper that can hold many types of securities including shares, bonds and funds. This means both the income and capital growth are tax-free.
Note that it is possible to have both types of JISA.
Who can open a Junior ISA?
JISAs are available to any UK resident, under the age of 18. But you cannot have a JISA and a Child Trust Fund at the same time, however, a Child Trust Fund can be transferred into a JISA. It’s important to be aware that anyone can contribute to a JISA, however, the Junior ISA must be opened by a parent or guardian, or a child (for themselves) who is aged 16 or 17. Equally, contributing to a JISA will not affect an individual’s personal ISA allowance. So as an adult, you can open a JISA for each of your children and then you and anyone who wishes to can contribute up to the limit per ISA each year.
Once the child turns 18, the Junior ISA will switch to becoming a standard ISA in their name and will benefit from the increased annual savings limit.
What is the savings limit for a Junior ISA (JISA)?
For the current 2021/22 tax year, and on into the 2022/23 tax year, the savings limit for Junior ISAs is £9,000 each year. The previous years’ JISA savings limits were as follows:
2020-21: £9,000
2019-20: £4,368
2018-19: £4,260
2017-18: £4,128
2016-17: £4,080
2015-16: £4,080
This means that in the six years since launch and including this year, a total of £38,916 could have been deposited into a child’s JISA and enjoying tax-free growth.
What is the benefit of a JISA?
The real benefit of a JISA is tax-free growth over time. As mentioned above, to date, a total of £38,916 could have been deposited in a child’s Junior ISA and invested in a range of growth securities, which could be anything from low-interest bonds and index trackers, right the way up to high-risk and diverse portfolios. As with any investment though, there is always the risk of loss as the value of investments can rise and fall.
To illustrate the possible growth from an ISA and the incredible way it could set a child up for life, imagine that you decide to open a stocks and shares JISA for your child today and take advantage of the 2021/22 JISA limit of £9,000 and for the sake of the argument, let’s say that the government freezes this allowance for the next 18 years. The result will be a total of £162,000 deposited in the child’s JISA, which alone would be an amazing head start to buy a car, see them through university and also put a decent deposit down on a property.
However, this calculation doesn’t take account of compound interest. To illustrate:
£9,000 each year for 18 years at 6% growth, compounded, would be approximately £295,000.
£9,000 each year for 18 years at 8% growth, compounded, would be approximately £364,000.
£9,000 each year for 18 years at 10% growth, compounded, would be approximately £451,000.
£9,000 each year for 18 years at 12% growth, compounded, would be approximately £562,000.
As you can see, at some fairly low levels of growth above inflation, the simple act of saving £9,000 each year into a child’s Junior ISA has the capacity to set them up for life and could even allow them to buy their first house outright for cash. They could also continue to save into their ISA each year which could then be used later in life to provide a tax-free income.
How can a JISA be used to transfer wealth to a child or grandchild?
The biggest issue whenever anyone considers transferring wealth is making sure it’s done in the most tax-efficient way possible and this usually means reducing inheritance tax as the first port of call. The main thing to remember is that, whilst you are alive, you have an annual gift allowance of £3,000. This means every individual can give away £3,000 each year without it being added to the value of their estate for inheritance tax purposes.
In very basic terms, this means that four grandparents could each gift £2,250 to a single grandchild in order to reach the JISA limit of £9,000 without breaching their annual gift allowance or subjecting the gift to possible inheritance tax. Another option, of many possible combinations, would be for two grandparents to gift £3,000 each and the parents to both gift £1,500 to the child to reach the £9,000 JISA savings limit.
Things can get a little more complicated though if there is more than one grandchild as the annual gift allowance will be breached rather quickly. This is where the 7-year rule on gifts starts to apply and, if you survive more than 7 years after the gift was made, then the gift is considered exempt from inheritance tax (IHT). A sliding scale of IHT applies after a few years but that is outside the scope of this article.
The important thing to remember though is saving sooner rather than later and keeping it regular is the key to building wealth. The question of whether or not there may be IHT to pay later on down the line could well be negated by the tax-free growth on the investment once the money is transferred into the JISA.
What are the drawbacks of a Junior ISA (JISA)?
The biggest drawback of a Junior ISA, particularly of those that are well-funded, is that once the child turns 18, they will be in full control of the money and could very well decide to go out and spend it as only an 18-year-old could. And even before then, they gain control over the account at the age of 16 so could make some questionable investment decisions. However, with a more positive spin on things, this is also a benefit as the point at which one is starting out in adult life is often the time that we need the biggest helping hand financially. Which way the coin lands is likely to be down to the financial education of the child as they grow up but that is for another day. You can read our article on financial tips for teenagers for some ideas.
Conclusion.
As mentioned earlier, the key to building wealth is consistent saving and investment over a long period of time. A Junior ISA offers a real opportunity to help out the next generation and give them a real financial head start. With the government always looking to tighten their budgets, it’s crucial to take full advantage of the annual allowances that apply as it’s never clear when those doors will close.
What’s next?
Have you opened a Junior ISA for your children? Do you think they are a good idea? Let us know in the comments below. If you need advice on JISAs, pensions or how you can invest for the future, you can get in touch with one of our advisors for independent financial advice. We offer a free initial consultation and although we are based in Tunbridge Well, we advise clients across the UK.
Don’t forget, this article offers information about financial planning and investing and should not be taken as personal advice. Remember that investments and pensions can go up and down in value, so you could get back less than you put in. Tax rules can change and the benefits depend on individual circumstances.