A case of tax efficiency versus control
We have a silly phrase we use with clients which is: ‘don’t let the tax wag the dog’. The words don’t make a lot of sense but somehow the meaning is generally understood, and we use it frequently when talking about investing for children.
The temptation for many is to look no further than Junior ISAs (JISA), a tax-exempt allowance of £9,000 per tax year which individuals can use to save for children. A variety of investment companies offer JISAs and access to some excellent funds is available. So, what’s not to like about JISAs? The answer is control. Firstly, access to any of the funds inside a JISA is not permitted until the child reaches age 18, so no dipping in to help fund the school ski trip. Secondly at age 16 the child takes ownership of the investment and age 18 they have full control – not you.
And these are the reasons we often encourage clients to look at alternative options. Our most popular solution is to set up an investment which is ‘designated’ for the child, but crucially the ownership remains with the investor and full access to funds is available at anytime without penalty. This account can be established in such a way that it does not disturb the investors own ISA allowances and although there may be some small tax considerations, we firmly believe when investing for children, control overpowers tax efficiency on most occasions.
By Philip Harper | February 2021