Buying ISA for grandchild

Ted_Bloke

ISA deadline time but I haven't got time to wait through a lot of stuff so if anyone can point me right quickly would be glad.

Thought I might give son money to buy ISA for grandson. But I read on the relevant mse pages that there is really no particular tax advantage in this, basically parents are taxed on most profits.

But that on the other hand it is okay and advantageous, tax shielded if grandparents buy for grandson. Can grandparents buy directly for grandson, can anyone buy an ISA for anyone else? Don't the parents have to have and manage the investment for the son or as long as he is minor? How does this work, please point me to get there soon.

xylophone

There is a Junior ISA for those under 18.

Interest on this particular type of account is tax free even if the capital is provided by a parent.

Only a person with parental responsibility for the child is permitted to open the account, but any relative or friend may contribute provided that the annual subscription limit is not breached.

You can check with your grandchild's parents whether he already has a JISA (or possibly CTF) - if not, draw their attention to

https://www.gov.uk/junior-individual-savings-accounts

https://moneytothemasses.com/quick-savings/parents/best-junior-stocks-and-shares-isa

capital0ne

If I was in this position I would start a pension for my grandchildren, then maybe an ISA

"But I read on the relevant mse pages that there is really no particular tax advantage in this, basically parents are taxed on most profits."

An ISA has a tremendous tax advantage, maybe not now, but 18 years of growth (compound of course) you could have many tens, maybe hundreds of thousand of pounds with a nice tax free return.

cloud_dog

capital0ne wrote: »

If I was in this position I would start a pension for my grandchildren, then maybe an ISA

Most posters on here would argue against prioritising a pension for a child unless of course you are loaded but, even so a JISA would be the first priority.

Reed_Richards

capital0ne wrote: »

If I was in this position I would start a pension for my grandchildren, then maybe an ISA

A major tax advantage of a pension is that you don't pay income tax on your contributions. But I don't think that applies if the contributions are towards a pension for your grandchildren. And when you draw your pension that money is taxed as income.

With an ISA there is no tax saving to be had on your contributions but any money you ultimately draw from the ISA is free from tax.

Both an ISA and a pension are wrappers around an investment but in this instance an ISA would appear to be a much more tax-efficient option that a pension.

Ted_Bloke

I should have said where I got the idea (which was a surprise to me) from, it was here:
https://www.moneysavingexpert.com/savings/junior-isa/
in the third paragraph.

So you are saying the parents should open an ISA if that is the choice and then the grandparent can contribute to it and somehow the authorities are able to distinguish the contributions when assessing taxation? The contribution however would have to be before April 5?

Tom99

How old are your grandchildren?
I opened a S&S JISA with Cavendish for my two Grandchildren with my daughter signing the forms.
I choose Cavendish because they would accepts a lower monthly contribution than they actually publish as a minimum and the fees were low at 0.25%.
Other platforms may well now be available at the low fee.

Reed_Richards

Ted_Bloke wrote: »

So you are saying the parents should open an ISA if that is the choice

Yes

Ted_Bloke wrote: »

and then the grandparent can contribute to it

Yes

Ted_Bloke wrote: »

and somehow the authorities are able to distinguish the contributions when assessing taxation?

No, the ISA is not taxed. The authorities don't really care where the money came from provided it is a legitimate gift.

Ted_Bloke wrote: »

The contribution however would have to be before April 5?

Not necessarily by any means. But you can only contribute £20k into an ISA in each tax year so if you want to give your grandchild more than that amount then it would make sense to begin before the end of the current tax year on 5th April.

Malthusian

If you are a grandparent you can give the money to the child to be invested for them in bare trust. The money will be taxable in the child's name, but income and gains will be within their personal allowance and capital gains allowance unless they are loaded. So they will pay the same amount of tax as if it was in a Junior ISA, none.

If you are a parent however, this doesn't work because if income from the investment exceeds £100, all income will be taxed as your own.

As a starting point, parents should therefore use Junior ISAs, and grandparents should use bare trusts and leave the Junior ISA allowance to be used by the parents.

If the parent is definitely not going to use the Junior ISA allowance, there is one advantage in a grandparent investing in a Junior ISA, even if the child doesn't have a large enough portfolio to pay tax; Junior ISAs automatically become adult ISAs at age 18. But this is only important if the child is going to have so much money when they turn 18 that their £20,000 adult ISA allowance won't be sufficient to move their non-ISA money into ISAs.

bowlhead99

Best to avoid confusing Junior ISA with a normal adult ISA.

If you want to use an ISA of some sort:

A child cannot have an adult ISA, only a Junior ISA. The parent would open the Junior ISA for the child, and once it has been created, you could contribute. The profits made in the Junior ISA are not taxable (on the child or on the parent) no matter who the money comes from. The money or investments in the account can only be accessed, by the child, when they turn 18 - at which point they can convert it to a normal adult ISA, or take the money out and spend it, or a bit of both. The parent can't touch the money in the meantime, other than to decide what it's invested in or move it between Junior ISA providers.

Alternatively you can gift the money to the parent, who can set up an adult ISA in their own name and put the money into it, or add it to an existing ISA they already have. It is still legally the parent's money, but there is no tax on income or gains made inside the ISA. As it is the parent's money, rather than the child's money, they can legally do whatever they like with it, including taking out and spending it on themselves or their child, or giving it to their child, whenever they like (e.g. at age 10, 16, 18 , 21, 30, never).

So, the two different types of ISA have different properties, but what they have in common is that all the income or gain generated inside an ISA is tax free. There are different annual limits - each parent can put £20,000 a year into their own adult ISAs, while the annual limit for a junior ISA is £4260 this year, increasing to £4368 for the new tax year next week.

xylophone

A sixteen year old can have both an adult ISA and a Junior ISA.

https://moneyfacts.co.uk/guides/savings/junior-isa-loophole-for-16-and-17-year-olds020212/