A common concern for parents will be the question of how to save for their children in a tax-efficient manner.
Whether it is a question of parents saving for their child’s educational needs or to give them a helping hand, or whether it is about how a legal guardian can help grow a younger person’s wealth, Jisas can facilitate all these requirements and more.
Tax treatment of Jisas is the same as the tax treatment of Isas; gains are free from capital gains tax, and income is tax free. There is a limit of £9,000 on the amount of money that can be paid into a Jisa each year.
A Jisa can be started with payments of as little as £10 a month or a lump sum of £25 (it varies by provider), and the amounts can be topped up, paused, or lowered in line with a client’s budget.
This conveys versatility and is useful for people with limited or varying excess income.
Family and friends can pay into the Jisa once it is established, which gives them an easy birthday or Christmas present option.
Access to/control of the funds
Monies in the account belong to the child from the start. They can have physical control of the account at age 16 but they cannot access the funds until they are 18.
This may of course not be such a good thing, as having access to a large amount of funds at the age of 18 could cause the monies to ‘evaporate’ or be spent in the pub rather than the book shop.
Any funds paid into a Jisa will be from the estate of the donor, under the £3,000 a year gifting allowance (this amount has not changed since 1981). This means parents could both put £3,000 into a Jisa, with a generous inheritance tax exemption.
If unused, the £3,000 allowance can be carried over for one more year only. Additional gifts beyond £3,000 a year can indeed be made into the Jisa pot; however, these would be classed as potentially exempt transfers (PETs) and could be liable for IHT.
Gifts out of excess income after tax are, however, wholly exempt from IHT, providing the gift forms part of normal expenditure and the donor’s standard of living is not adversely affected by making these gifts.
Claiming exemptions for other lifetime gifts have not increased in 40 or so years, the exemption for surplus income could prove invaluable when considering Jisa contributions and IHT planning.
Moreover, grandparents may have a decent amount of surplus income to contribute to a grandchild’s Jisa or future nest egg.
Types of Jisas
As with an Isa, there are cash or stocks and shares Jisas. Whichever version is most relevant depends on the individual’s personal situation and the goal for the funds.
As ever, the choice comes down to attitude to risk, capacity for loss and the desired outcome, which is why seeking advice is so important.
Are Jisa funds protected?
Any cash paid into a Jisa is protected up to £85,000 by the Financial Services Compensation Scheme, and if a client has more than this limit in the account it is a good idea to consider moving the excess amount into a separate account.
Alternative options to the Jisa
A child’s pension fund can get children or grandchildren off to a flying start by investing monies over decades.
Anyone can make contributions into someone else’s pension scheme, and tax relief applies on payments up to £2,880 a year, which means a gross pension contribution of £3,600.
This is basically ‘free money’ that the recipient will receive in tax relief, and any growth from investment will increase the pension pot.
Unlike Jisas, this option ensures the child has savings for retirement, as they cannot be accessed until they are 57 (currently) unless they suffer ill health. As the pension is held in the child’s name, no tax liability falls on the parents.
On the flipside, by paying into a pension, restricting access until age 57 will not work out well if the goals of the client are to create a nest egg to fund university costs or a house deposit.
Setting up a bare trust is a flexible way of gifting money to a child without simply passing the funds to the beneficiaries.
Tax advantages of a bare trust can be generous, much like a Jisas, especially if assets are put into a bare trust for someone who is not the person’s child (for example, it could be a grandparent).
In this instance, the income and capital gains are taxed as the beneficiary’s income and gains. It is unlikely that a child will have earnings beyond the personal and dividend allowances, and therefore the income and gains could be tax-free.
On the other hand, if assets are placed in a bare trust by a parent, the entire income is taxed as the parent’s income if the income produced is more than £100.
Moreover, for IHT purposes, putting assets into a bare trust is treated as a PET, but if you survive for seven years (after the PET was made) there will be no IHT.
There is also no 10-yearly charge, as the trust assets are not relevant property.
Discretionary trusts can be a more flexible option as these give the trustees power to make decisions on when the child can access the funds.
There are also no contribution limits that apply to funds paid into a trust (another advantage, considering the annual limit imposed for JISA contributions).
In conclusion, a JISA is a simple way of providing a kick start for children in adult life, but they have some drawbacks and other solutions could work better, depending on the goals of a client.
Speak to a GSI Financial Planner for more advice or discuss what other options may suit your needs better.
Adapted from an article in The Financial Times by Josh Martin DipFA