Our clients often ask us for advice about putting money away for their children and grandchildren and the introduction of Junior ISAs in November 2011 has made this something of a hot topic with financial journalists. In this article we will start with a reminder of the Child Trust Fund and Junior ISA rules and then provide our view on how best to use these.

Junior ISAs

A child can have a Junior ISA if they:

• are under 18
• live in the UK
• do not already have a Child Trust Fund account

Junior ISAs are available for all children born before CTF eligibility in September 2002, as well as children born from 3rd January 2011.

Each child can have one cash and one stocks and shares Junior ISA at any one time. Anybody can put money into a Junior ISA for an eligible child. The total limit for payments into Junior ISAs is £3,600 in each tax year. Your child can have both a cash and a stocks and shares Junior ISA. If they do, the total amount that can be paid into the two accounts in each tax year is £3,600. For example, £2,000 into a cash Junior ISA and £1,600 into a stocks and shares Junior ISA. As with adult ISAs, there will be no tax to pay on any interest or gains.

The money in a Junior ISA belongs to the child, but whereas an adult ISA can be accessed at any time, a child can’t take the money out until they are 18. Furthermore, when they reach 18 they have complete control over what they do with the money. If the child chooses not to take the money out, the Junior ISA will automatically become an ISA.

Child Trust Funds

The Child Trust Fund (CTF) is a tax-free savings account for children born between 1st September 2002 and 2nd January 2011.

For each child that was entitled to a CTF account, HMRC sent a voucher of either £50 or £250 depending on when the child was born. The account could then be topped up to a maximum of £1,200 p.a. From 1st November 2011 this limit was increased to £3,600 in line with Junior ISA rules.

As with Junior ISAs, the money is tax advantaged but is locked up until the child is 18 and at that point becomes theirs outright.

It seems likely that the CTF and Junior ISA regimes will be aligned at some point but for now they will operate side by side.

Should you invest in a Junior ISA or CTF?

Where parents want to set up a separately identifiable investment portfolio for their children, Child Trust Funds proved a reasonably easy way of doing this and we expect Junior ISAs to do the same. The higher contribution allowance also means that if you are happy with the disadvantages (lack of access/child getting full access at 18), this gives parents, grandparents and family members an opportunity to build up a sizeable, tax-efficient portfolio for the child in question.

Whilst children have a personal tax-free allowance each year (£7,475 for the 2011-2012 tax year) if a child gets more than £100 p.a. of this from money given to them, or invested for them, by a parent, this is taxable. Each parent has a separate £100 limit so if both parents contribute equally, the child could get interest of £200 a year without either parent having to pay tax on it.

The CTF and Junior ISA rules mean interest and dividends in these tax-efficient wrappers do not count towards the £100 limit.

However, despite these positive aspects of CTFs and Junior ISAs, many parents are concerned about their children receiving a large pot of money at 18. Many are also worried about the money being tied up and therefore inaccessible. An alternative is for parents to make their own finances as efficient as possible, with a coherent strategy across pensions, ISA, mortgage repayments and other investments and retain control over when and how much money to pass to their children, perhaps to cover university costs or to put towards their deposit on a first home. Where proposed gifts to children, and more probably grandchildren, are large and are part of an Inheritance Tax planning strategy, trust arrangements may be more appropriate.

Our conclusion is that there is no right or wrong. If you can afford to tie money up and are comfortable that your child will use it wisely at age 18 then the launch of Junior ISAs and increase of investment limit on CTFs should be seen as a very positive development. However, there are many parents whose finances don’t really allow them to tie money up and who are also nervous about giving their child access to a 5 or maybe even 6 figure sum at 18.