Tax-free Junior ISAs Following the closu

Tax-free Junior ISAs

Following the closure of the Child Trust Fund (CTF) to new entrants earlier this year, the Government has announced that it will create a new tax-free children’s saving account during 2011. The Junior Individual Savings Account (ISA) is being brought in to replace the CTF, although there are some important differences.

How will the new account work?

The new Junior ISA will have similar terms and conditions to the adult version. Investments will be available in cash or stocks and shares and all returns will be tax-free. Annual contributions will be capped, although at the time of going to print the annual investment maximum had not been announced. Funds placed in a Junior ISA will be owned by the child but investments will be locked in until the child reaches adulthood.

The Government has confirmed that Junior ISAs should be available by Autumn 2011. However, this means that there will be a period of several months when parents of newborn children will not be able to invest in either a CTF or a Junior ISA (the CTF closed to new entrants on 1 January 2011). Consequently, eligibility for the new ISA will be backdated to ensure that no child born after the end of CTF eligibility will miss out on the opportunity.

Mixed news for parents

Under the CTF regime, the Government made a series of payments into the account, although these contributions have now ceased. (Existing CTFs will continue until maturity on the child’s 18th birthday, and friends and family can continue to make contributions into the funds up to a maximum of £1,200 a year).

However, unlike CTFs, the Government will not be making any direct contributions into the Junior ISA. On the plus side, parents will be able to invest money for their children without having to pay tax on it. Currently, anti-avoidance rules mean that parents who transfer their own money into their child’s name have to pay the tax on interest where it exceeds £100 gross per year. The Junior ISA will give parents an exemption from this. Parents will be able to save tax by shifting investments to their children over the life of the Junior ISA.

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