When saving or investing for youngsters and teens, this is the UK's best tax haven!
As the parents of two children at primary school, my wife and I are doing what we can to help them financially as they head for adulthood.
My daughter was born in 2003, so she was the right age to qualify for a Child Trust Fund (CTF). However, my son was born in 2001, so he's too old for a CTF. Instead, he has a portfolio of shares sheltered safely inside a bare trust.
As well as these share-based investments, my children also have cash savings accounts, into which go money from family and friends. Also, they both have pensions, which they cannot touch until they are 55 or over.
Juicy Junior ISAs
Alas, because my daughter has a CTF, she is the wrong age to have the latest tax haven for kids, known as a Junior ISA (Junior Individual Savings Account, or JISA).
On 1 November 2011, JISAs replaced CTFs as the tax haven of choice for parents, grandparents, other relatives and friends, to save and invest for babies and toddlers. These folk -- and the children themselves -- can put up to £3,600 a year into a JISA, which works out at a round £300 a month.
However, any child with an existing CTF (who was born between 1 September 2002 and 2 January 2011) cannot also have a JISA. Then again, all children born on or after 3 January 2011 can open a JISA, as can children born before 1 September 2002. My son falls into this second category, so he is excited that -- at long last -- he too can have his own personal tax shelter!
Despite these age restrictions, roughly six million children are eligible to open a JISA, with 800,000 newborns added to this group of potential savers and investors each year.
Two types of tax haven
Just as adults can choose between cash ISAs and stocks and shares ISAs, children can shelter cash savings in a cash JISA, and keep shares, funds and other investments inside a stock and shares JISA. (For your full guide to ISAs, please download your free copy of our ISA Guide 2012 today.)
With a Junior ISA, there is no tax to pay on cash interest (even in stocks and shares JISAs), no tax on share dividends (the regular cash payouts to shareholders) and no tax on capital gains (the profits made from selling shares and other assets). Thus, JISAs are set to become the number-one tax haven for young savers and investors.
As a bonus, the JISA allowance will rise in line with the Consumer Prices Index (CPI) measure of inflation from the 2013/14 tax year onwards. This means that as the cost of living rises, so too can contributions.
Transfers between JISAs
Adults can open new cash or stocks and shares ISA each tax year with different providers. Sadly, children can have only one cash JISA and one stocks and shares JISA. Thus, it pays to choose JISA providers wisely.
However, as with ISAs, transfers between JISA providers are allowed, so you can switch to better-value JISA accounts at will. In addition, transfers from stocks and shares JISAs to cash JISAs are allowed, but this transfer is still banned between adult ISAs.
Sweet 16 and 17
I can reveal one sneaky loophole for teens aged 16 and 17. Uniquely, children of this age can have both Junior ISAs and cash ISAs, because adult cash ISAs are open to savers aged 16 and over. Hence, teens of rich families could pump £3,600 plus £5,340 into these two tax shelters, a combined total of £8,940 this tax year and £9,240 in 2012/13.
Finally, at 16, teens can take over the management of their Junior ISAs. At 18, these convert into full-blown adult ISAs -- and these brand-new adults have complete control of their pots. Let's hope they spend and invest their money wisely... and not on fast living!
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