- How to use a Child Trust Fund and Junior ISA (JISA) to save £36,000 for your child in one year
- Quirk of the tax system allows CTFs to be used twice in a year…
- …and JISA allowance on top means someone could set aside £36,000 in tax-free investments in a window of just a few weeks, depending on when their child is born
Parents can set aside £36,000 in JISAs inside a matter of months thanks to quirks in the tax system, AJ Bell head of personal finance Laura Suter explains.
Where a child holds a Child Trust Fund (CTF) they can pay up to £9,000 a year into the account. Unlike JISAs, their allowance renews on their birthday, not the tax year. It means you can put £18,000 away for a child during the tax year – £9,000 just before their birthday and £9,000 after their birthday.
This £18,000 CTF (plus any pre-existing money in the account) can then be switched to a JISA. Once the transfer is complete (an individual cannot hold a CTF and JISA simultaneously) parents can then make a further £9,000 contribution into the JISA. This will utilise their JISA allowance for the current tax year, leaving £27,000 in their JISA.
At the beginning of the new tax year, the new £9,000 JISA allowance can be used to make a further contribution, taking the total to £36,000 in just a short period of time, depending on how close their birthday is to the end of the tax year.
Laura Suter, head of personal finance at AJ Bell, comments:
“The UK’s complicated tax system creates some great loopholes for savers, and this one means parents can save up to £36,000 into a tax-free savings account per child in as little as a few months. A clash between how the rules differ between Child Trust Funds and Junior ISAs, plus the generous £9,000 annual allowance per child, means that parents can exploit the loophole to save a huge amount of money in 12 months, or less. It makes it one of the most generous savings limits out there.
“Clearly it depends when the child’s birthday is as to how quickly you can funnel that £36,00 into the accounts. And it’s sad times for those children who are born just before tax year end, as their parents may not have enough time to make the second Child Trust Fund contribution, transfer the account to a Junior ISA and make the first Junior ISA contribution before the tax year end. But for anyone not born at the start of April it makes a pretty attractive wheeze. The other big caveat is that parents need to have £36,000 that they want to save for their children. But for wealthy families looking to do some tax planning it’s a good move.”
Example
Let’s take the example of a child born on 1 February who has a CTF. The parents could make a £9,000 contribution to the CTF on 31 January and then make another £9,000 contribution on 2 February. They could then transfer that account to a Junior ISA on 3 February. As they get a fresh annual allowance from moving to the Junior ISA, they can contribute another £9,000 once the transfer is complete. And then a couple of months later, when the new tax year hits on the 6 April, they can make yet another £9,000 contribution into the Junior ISA. All in that’s £36,000 saved in a tax-free account in a matter of months.
