JISA - is this tax-efficient savings vehicle on your shopping list?
ISAs have long been appreciated as a basic part of wealth management planning however recent changes by the government have increased their flexibility for investment on behalf of minors and ultimately tax efficiency on death. When combined the benefits of an ISA portfolio are becoming hard to ignore for many investors who previously could have overlooked them. Junior Individual Savings Accounts (JISAs)
With university fees at an all-time high and mortgage deposits often beyond the reach of first-time buyers, the JISA, which was launched in November 2011, offers an efficient savings vehicle with many of the same features as adult ISAs.
In addition, since April 2015 it has been possible to transfer existing child trusts funds (CFTs) over to a JISA. Investment limits of £4,060 mean that, in a similar way to the adult ISA, using the allowance each year in the long term can generate a sizeable pot.Eligibility
To satisfy eligibility, children must be resident in the UK however any person or organisation can contribute to a JISA and the account is held in the child’s name.
Where money typically gifted by a parent and produces gross income of more than £100 a year, the parent is liable for tax on all the income. However like their predecessor the CTF, JISAs avoid this because the parents do not have control of the money. Although this lack of control may be worrying for some, it is important to note that no withdrawals are allowed until the child reaches the age of 18 and then it is legally their money.
Contributions by anyone other than the child would not qualify as a gift for inheritance tax purposes, but the £3,000 annual exemption and/or the normal expenditure for income exemption may be available to cover such gifts. Like adult ISAs, JISAs are not subject to capital gains or income tax and are available as stocks and shares or cash accounts. A child can hold both types providing the annual contribution limit is not exceeded across both accounts.
Until the child is 16, the JISA must be managed by a person with parental responsibility for the child. At 16, the child may take on the management if they wish and at the age of 18, the JISA is converted into an adult ISA. Importantly, JISA contributions will not impact upon adult ISA limits i.e. at 16 a child can open an adult cash ISA and at 18, an adult stocks and shares ISA, regardless of whether a JISA has been subscribed to that tax year, allowing for potential contributions of almost £60,000 in the last three years before maturity. Preparing for maturity
As with any investment, JISAs may not be suitable in all circumstances, and there are pros and cons. It can be a long-term, tax-efficient savings route for a child; however, there is no flexibility on early access. At 18 the account holder then has complete access to the proceeds. This may be a cause for concern as the young adult will have full access to the money. With many young adults having debts in their 20s, it reinforces the fact that there is a responsibility to educate our children about money and financial planning. In the longer term, the JISA could be used in conjunction with university funding plans, pension contributions for children and/or trusts to help with planning for a child’s future. However, particularly for those who have fully utilised their own ISA allowances, the JISA must be first on the shopping list to help our children financially on entering adulthood.ISA transfer on death
Recent changes by the government has meant that the preferential tax treatment enjoyed by ISAs is no longer lost on death as an investors spouse or civil partner is allowed to contribute an amount equivalent to the deceased’s ISA holding into their own ISA via an additional allowance.
Whilst this means the surviving spouse can continue to enjoy tax-free investment returns on savings equal to the deceased’s ISA fund, it crucially does not have to be the same assets which came from the deceased’s ISA which are paid into their spouse’s new or existing ISA. The surviving spouse can make contributions up to their increased allowance from any of their assets.
By not linking the transferability to the actual ISA assets, it provides greater flexibility and does not have an adverse impact on estate planning that clients may have already put in place. The rules entitle the survivor to an increased ISA allowance for a limited period after death. The actual ISA assets will be distributed in line with the terms of the will (or the intestacy rules) and remain within the estate for IHT.
Where they pass to the spouse or civil partner, they will be covered by the spousal exemption (as they always would have). Even then, ultimately the combined ISA funds may be subject to 40% IHT on the second death.
The transferability for CTFs to JISAs and the new inherited allowance complements what is already a tax efficient investment option albeit with increased generational planning options.By Sarah Thi, Rachel Wells, and Martin Jarvis - Consultants