Junior ISAs were made available from 1 November 2011. The Junior ISA is available for any UK-resident child (under the age of 18) who does not currently hold a Child Trust Fund (CTF) account.
While having no tax relief on input (as for the “adult” ISA), Junior ISAs are tax-relieved and have many features in common with existing ISA products. They are available as a cash or stocks and shares product.
As would be expected, a number of the current ISA regulations apply equally to the Junior ISA e.g. the general investment rules and qualifying investments for a stocks and shares account. In some aspects, the Junior ISA resembles the Child Trust Fund (CTF) account e.g. parental contributions are not subject to the parental settlement income tax rules.
Below we examine the ISA rules which, suitably amended, apply specifically to the Junior ISA.
The JISA is available to an eligible child. An eligible child is one aged under age 18 (there is no minimum age):
(a) who is born on or after 3 January 2011 or before that date but was not eligible for a CTF account, for example a child born before 1 September 2002 who was therefore not eligible for a CTF account,
(b) who, at the time the JISA is opened, is
(i) resident in the UK; or
(ii) a Crown employee working overseas or the spouse/civil partner of such a person or a dependant of such a person.
It should be noted that it is the child’s residence status at the time of opening the account that counts – future non-UK residence will not prevent further subscriptions being made to the JISA.
An application may be made by:
(a) a person who has parental responsibility for an eligible child; or
(b) an eligible child who is aged 16 or over.
An account is operated by the registered contact. A registered contact is the person who is able to give instructions to an account manager in connection with the management of a JISA. This will be an eligible child who holds an account and who has attained age 16 (unless suffering from a mental disorder) and in any other case the responsible person for that account.
The responsible person is one who either opens the account or assumes responsibility for managing the account (via an application to the account manager) and at that time has parental responsibility for the eligible child.
When an account is opened for a child aged 16 or over it is treated as opened, for contract purposes, by an 18 year old child. This is to enable the child to manage their account from age 16.
Each eligible child can only have one stocks and shares and/or one cash account throughout their childhood (contrast adult ISAs where the investor can open and subscribe to two new ISAs in each tax year). This means that it will not be possible to hold more than one cash or stocks and shares JISA at any time although it is possible to switch provider and someone between the ages of 16 and 18 can hold one of each type of JISA plus an ‘adult’ cash ISA. The eligible child will be the beneficial owner of the account investments.
Transfers can be made from a cash account to a stocks and shares account and vice-versa.
Any assignment or charge on investments under a JISA are void and on the bankruptcy of a child (whilst holding a JISA) the entitlement to investments under the JISA does not pass to any person acting on behalf of the child’s creditors.
Any person may subscribe provided total subscriptions in a tax year do not exceed the subscription limit of £9,000 for 2020/21 (£4,368 for the tax year 2019/20). There is no minimum subscription. Fixing a minimum subscription is down to account providers but it seems some plan to permit an account to be opened for as little as £1.
Any overpayment must be repaid by the account provider.
Subject to not exceeding the £9,000 maximum, the subscriptions may be made to:
(a) a cash account;
(b) stock and shares account;
(c) or split in any proportion between a cash account and a stocks and shares account.
Before the child has attained age 18, the only withdrawals that can be made are those to meet management charges or other incidental expenses. Additionally, a payment may be made if a child dies before age 18.
Withdrawals will also be permitted before a child reaches age 18 where HMRC is satisfied that a child is “terminally ill”. In this context a child is terminally ill if “he suffers from a progressive disease and his death as a result of that disease can reasonably be expected within 6 months” (s66(2)(a) Social Security Contributions and Benefits Act 1992), or the child is entitled to the care component of disability living allowance for terminally ill people.
As there are no prescribed minimum contributions or payment methods, an account manager must specify the minimum single amount that can be subscribed and the permitted payment methods. Also, when the subscriber is a person other than the named child (i.e. the child beneficially entitled to the JISA) he/she must be informed that the payment of a subscription counts as a gift to that child.
It is a requirement for the account manager or registered contact (as appropriate) to take any steps necessary to remedy a breach of the regulations. Once remedied, the account is treated as being valid at all times.
All income and capital gains arise free of tax, and capital losses are not allowable. The parental settlement income tax anti-avoidance rule will not apply. This means that if income in a tax year derived from the subscriptions of a parent exceeds £100 gross, it will not be assessed to tax on that parent even though the child is a minor who is unmarried and not in a civil partnership.
Upon an account ceasing to be a JISA account when the named child holding the account attains the age of 18 years, the account manager shall provide details in writing of the market value on that day to the person who is the holder of the account immediately before the account ceases to be a JISA account and becomes an adult ISA.
From 6 April 2015 it has been possible for parents to transfer their children’s CTF into a JISA.
Use of the JISA will be a necessary consideration for anyone looking to structure a tax effective savings/investment strategy for a minor. Given that no access to funds will generally be permitted until age 18, the JISA is likely to form an essential part of funding for the increasing costs of higher education.
Of course, parents and grandparents can save in their own ISAs for this purpose, but these savings will remain in their estate and be incapable of specific designation or assignment to children. The funds invested in the ISAs of parents/grandparents can, of course, be used to fund higher education costs through outright or conditional gifts, when the time is right, e.g. to fund fees or say a deposit for the purchase of a first home. In this respect, ISAs remain a flexible highly valid vehicle for tax-effective saving.
As for the CTF, the parental anti-avoidance provisions will not apply to the income and gains of the JISA. Any contributions made by a parent/grandparent will count as a gift for inheritance tax (IHT) in the normal way. Of course, the usual exemptions from IHT, if available, would apply.
As for the CTF, to the extent that the JISA contribution limit is exceeded, other means of tax-effective savings for children should be considered.
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