Parents are being reminded they could save up to £36,000 for their children without having to pay tax thanks to a useful savings tool.
Analysts are families can utilise Child Trust Funds (CTF) could to this lump sum in a matter of weeks by exploiting a quirk in the system.
According to savings experts, this strategy involves using both CTF and Junior ISA allowances in quick succession.
Charlene Young, pensions and savings expert at AJ Bell, explained: “The UK tax system is full of traps and distortions, but every so often, it also throws up quirks and loopholes that can help people shelter more money than usual.”
This particular opportunity is only available for children born between September 1, 2002 and January 2, 2011. The trick hinges on the different anniversary dates for the two savings vehicles.
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Analysts are revealing the £36,000 tax-free savings loophole
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CTF allowances renew on the child’s birthday each year, while Junior ISAs follow the tax year.
Young outlined how the loophole works: “Both come with a generous yearly allowance of £9,000 but the CTF allowance renews on the child’s birthday each year, whilst the Junior ISA runs in line with the tax year.
Since a child cannot hold both a CTF and JISA simultaneously, the transfer must be completed before additional contributions can be made.
Parents need to plan carefully around their child’s birthday and the tax year end to take full advantage.
Young provided an example: “Let’s assume a child with a CTF was born on March 1, 2009. Their parents could pay in £9,000 on February 28 and another £9,000 on March 2 before immediately applying for a transfer to a Junior ISA.”
This transfer unlocks a fresh £9,000 JISA allowance that can be used before the tax year ends. When the new tax year begins, parents can contribute another £9,000 to the Junior ISA.
This strategy allows for four separate £9,000 contributions in quick succession. “Parents of a child with a CTF could get four bites of the £9,000 allowance cherry,” says Young.
The feasibility depends on the child’s birth date falling near the tax year end. Families must also have £36,000 available to take full advantage of this opportunity.
ISA products are useful savings accounts for those looking to avoid pay tax on interest
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Even if families cannot utilise the full £36,000 loophole, Young advises that transferring from a CTF to a Junior ISA is beneficial.
“Many young people who have Child Trust Funds but are still under 18 would benefit from a transfer to a Junior ISA anyway,” she notes.
The advantages include lower charges compared to CTFs. Junior ISAs also offer a much wider investment choice for families.
For parents without CTFs, Young highlights there’s still an opportunity to save tax-efficiently.
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Parents are being called to start saving for their child’s future
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For parents without CTFs, Young highlights there’s still an opportunity to save tax-efficiently.
“For parents of children without a CTF, there is still the chance to put away up to £18,000 over the next six weeks for each of their children using the full JISA allowances for this tax year and the next.”
Junior ISAs also help parents avoid the “parental settlement rule”. This rule normally taxes parents on income over £100 generated from money they gift to children.
“If a parent paid £9,000 cash into the top children’s savings account earning five per cent, the interest of £450 over the year would be taxable on the parent,” explains Young.
In a Junior ISA, this income accumulates tax-free. The funds remain locked until the child turns 18.
“For wealthy families looking to start to pass money to the next generation, sticking money into a JISA can prove a valuable loophole to avoid unnecessary tax.”