Planning for childrens' savings

From April 2015 parents and guardians can transfer existing child trust funds (CTFs) to junior ISAs, potentially giving better rates and choice for millions of investors. There are of course pros and cons for switching funds and these should be carefully considered in the run up to the change.

Interest earned from CTFs and Junior ISAs is paid tax-free, but the money is locked in until the child is 18, at which time it belongs to the child. Standard savings accounts usually offer lower interest rates and the interest is likely to be taxable, but there will be flexibility on withdrawals and transfers, enabling the parent to keep a tight rein on the money.

Up to £4,080 (2015/16) may still be added tax-free to existing CTFs but it is no longer possible to open new accounts.

The maximum investment limit for 2015/16 has been set at £4,080. Until April 2015 it has only been possible for children who do not hold CTFs to invest in Junior ISAs, which has meant that many young savers have been trapped in accounts yielding poor interest rates. From April 2015 all children (under-18s) who are UK resident should be able to hold a Junior ISA and transfers from CTF accounts to Junior ISAs will be allowed. This change is important as it will allow parents to look for a better return on their investment, pay lower charges and have more choice of products.

Whether an existing CTF should be switched to a Junior ISA greatly depends on whether the child currently pays tax, and whether they will save enough to pay tax on their savings when they are 18. If the child is likely to save more than £15,240 (the annual ISA limit from 6 April 2015) in their first 18 years, then it is probably worth considering a Junior ISA, as these convert to full cash ISAs when the child turns 18.

Parents who are not fully utilising their own annual ISA allowance could set aside some of this to invest for their children. The benefit of tax-free interest will still be achieved, but the money will still be under parental control.

Children are entitled to an annual personal allowance (£10,600 for 2015/16). Although Junior ISAs (and CTFs) are tax-free, unless the child stands to earn interest of more than £10,600 from other types of investment accounts, he or she should not pay tax on the interest earned in any case. Therefore, for those with modest savings, one of the most important considerations when choosing a savings plan should be the interest rate on offer and potential return on the investment.

For further reading on incentives for investments, see Bloomsbury Professional Personal Tax Planning 2014/15.

Sarah Laing 

Sarah Laing is a Chartered Tax Adviser and has worked for both small and Big Four firms. An established writer, she has contributed to a range of highly regarded tax publications, including Bloomsbury Professional's Core Tax Annual: Income Tax and Partnership Taxation 2014/15.

To order your copy of Personal Tax Planning 2014/15 go to:

Written by Ellie MacKenzie

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