The Junior ISA scheme was launched at the start of November 2011 and has since become a popular way to save for a child’s future. For those who haven’t yet investigated the option it is worth reminding oneself what exactly an ISA is and in particular, the definition of a Stocks and Shares ISA (SSISA). This article focuses on SSISAs but to give a full overview on the product we will also need to look at the full gamut of ISA options and the context in which the product fits into the financial spectrum.
An ISA is a financial product in which people can save and invest money with the benefit of certain tax breaks. They were launched at the start of the 1999/2000 tax year with the aim of providing the wider public with a more accessible tax beneficial savings solution than the existing Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs).
The main attractions of ISAs are that they carry tax exemptions on the income generated by the products whilst still allowing savers to instantly access their funds. They also allow savers to invest in stocks and shares as well as just storing their funds a cash. There are however restrictions which apply in that there is a limit (or rather limits - see below) to the amount of money that savers can put in each tax year.
There are currently two types of ISA available to the UK saver: the Cash ISA (CISA) and Stocks ad Shares ISA (SSISA). As the names suggest the CISA is primarily designed to hold cash whilst the SSISA is primarily designed as a vehicle for investing savings in stocks and shares.
Stocks and Shares ISAs are available to over 18s (Cash ISAs are open to over 16s) and can hold a range of investments including, amongst others, cash (as long as it is deemed to be awaiting investment), collective investments (Units Trusts, OEICs and Investment Trusts. Subject to certain criteria), company shares (listed on recognised stock exchanges and debt securities (corporate bonds, government bonds. Subject the term having at least 5 years to run). All of the non-cash investments must also be deemed to have the potential to lose 5% of their value to be permitted. Any that are not, may in theory be held in a CISA but it is rare to find a provider that offers the service.
A contribution to an ISA is termed a subscription and all ISA subscriptions must be made in cash. The limit that savers can subscribe to ISAs in total for the current tax year is £10,200. All of this allowance can be paid into a Stocks and Shares ISA or up to half, £5,100, can be paid into a Cash ISA with the remainder of the unused £10,200 allowance going into a SSISA. These limits are set to rise in line with inflation each tax year (with increments rounded to the nearest £120), with the figures for 2011/12 being £10,680 (SSISA/Total) and £5,340 (CISA).
Subscriptions cannot be spread between multiple ISAs of the same kind in the same tax year, although subscriptions can be made to both a Cash ISA and Stocks and Shares ISA concurrently. There is also no limit on the number of ISAs that an investor may hold from previous tax years.
Funds can be transferred between ISAs although there are restrictions to ensure savers can’t oversubscribe. The transfers must occur directly between ISA providers; if the money is withdrawn by the saver with the intention of placing it back in another ISA it effectively becomes a subscription and therefore affects their allowance for that tax year.
If a saver is transferring monies that are current year subscriptions from one Cash ISA to another CISA they must transfer the entire sum of current year subscriptions to ensure that they have not subscribed to two separate CISAs in the same tax year. However, a saver can transfer only part of their current subscriptions from a CISA to a Stocks and Shares SISA as the allowances of the two products can be adjusted accordingly (the transfer would then count against the SSISA allowance not the CISA).
Neither the Stocks and Shares ISA or the Cash ISA are subject ot Capital Gains Tax (CGT) although that does also mean that any losses made on the SSISA cannot be used to offset gains elsewhere and reduce an individual’s CGT obligation. Both ISAs are exempt from tax on dividends,the SSISA is exempt from tax on interest on bonds whilst the CISA is also exempt from tax on interest from cash.
Stocks and Shares ISAs are still subject to other charges though such as Initial Management Charges (IMCs), Annual Management Charges (AMCs) and transaction charges by the ISA provider or fund manager, however, these charges are often heavily discounted or removed for commercial reasons. Any charges on Cash ISAs will most likely be incorporated into the interest rate calculations.
Although ISAs were designed to supersede the existing PEPs and TESSAs when they were launched in 1999, both products were maintained alongside the new ISAs - that is they could still be held although no longer open to new subscriptions. TESSAs allowed savers to invest £9,000 across a 5 year term during which the saver could draw down the interest on the capital but not the capital itself, which could only be withdrawn when the account matured. For those maturing after the introduction of ISAs, the TESSA-Only ISA (TOISA) was created to allow the saver to reinvest the capital. The last TESSAs matured on 5 April 2004. However, at the start of the 2008/09 tax year the decisions was taken to re-classify the PEP and TOISA to fit into the ISA structure; PEPs became de jure SSISAs and TOISAs became CISAs.
The structure of the ISA was slightly different when it was launched as it is today in that there two main types available, the mini and the maxi ISAs. Mini ISAs were further categorised as Stock or Cash ISAs, although an individual could subscribe to one of each within a given year (even with different providers). The limits were set to £4,000 for the mini stock ISA and £3,000 for the mini cash ISA, with a total subscription limit therefore of £7,000. The alternative maxi ISAs combined the cash and stock elements into one product although the limit to cash subscriptions remained at £3,000 and the total allowance at £7,000; any of the £7,000 not invested in cash could be invested in stock. The switch the current structure of Cash ISAs and Stocks and Shares ISAs with no mini vs maxi distinction came at the start of the 2008/09 tax year.
Going forward the UK Government have announced that they are to launch a Junior ISA for the 2011/12 tax year which will replace the outgoing child trust fund. The Junior ISA will allow guardians to subscribe to an ISA on behalf of a minor who will then have access to the funds when they turn 18. In all other aspects the ISA will follow the conventional structure and rules.
With the clock counting down to the end of the tax year now might be the last chance to take advantage of this tax year’s ISA allowances or to do your research ready for the advent of the next set of allowances. Either way, it might be a good time to investigate opening a Stocks and Shares ISA or ISA investment Trust.
© Stuart Mitchell 2012
Showing posts with label tax. Show all posts
Showing posts with label tax. Show all posts
Wednesday, 19 December 2012
Monday, 9 January 2012
Why Save for Your Child’s Future?
The demise of the child trust fund set up by Labour in 2005 and the prospect of the Conservative-Liberal Democrat coalition’s new Junior ISA in the autumn of 2011 means that for many they will be re-assessing whether and how they will be saving for their child's future. As the cost of living seems set to continue its upward path, it is therefore worth taking a look at the benefits that still exist for putting money aside for children.
There are significant tax breaks to be gained when saving on behalf of your children, although as with all such schemes there are some limits and restrictions to be aware of.
Savings accounts for children are exempt from any tax on the interest that accumulates on deposits as long as the child in question does not have a total income exceeding £6,475 for the current tax year (as with adults). However, if the money which is donated by an individual parent or step parent earns more than £100 interest in a tax year then the interest will be taxed as normal. This limit applies per parent though, so in a family with both parents present, the combined possible limit is £200 and there is even the potential for the limit to be as high as £400 if two step parents are involved. What’s more, the limit does not apply to grandparents and other adults that wish to contribute to a child’s savings plan. Therefore, these restrictions should not prevent parents and guardians from accumulating a healthy nest egg for their children which also benefits from the tax exemptions.
In addition, it is worth bearing in mind that any money placed into a child’s savings account will avoid being taxed inheritance tax providing the donor does not die within seven years of making the donation.
Whilst the Child Trust Fund (CTF) is being phased out by the coalition government, it is still a valid savings solution for many parents and their children. All children born between September 1st 2002 and January 2nd 2011 were eligible to start a child trust fund if they were paid any child benefit before January 3rd 2011. For those who have already opened an account, payments can still be made into it until the child turns 18. The trust benefits from a starting contribution from the government of at least £250 (except children who first received child benefits after August 2nd 2010 who will receive £50 only) with the possibility of further contributions for children in low income families. All income and gains from the CTF will be tax free although the contributions made by parents (or any other donors) must not exceed £1,200 in the tax year. The funds are held in trust for the child and although they can take over the management of the fund when they turn 16, they cannot withdraw funds until they turn 18 years of age. At which point they will also be able to transfer the funds to an ISA to protect the tax exempt status.
The coalitions government’s replacement to the CTF is the Junior ISA which is due to launch in the Autumn. The Junior ISA will not receive the government contributions that the CTFs benefited from however it will allow parents to save on behalf of their children and take advantage of the tax exemptions and investment choices that adults can currently benefit from with conventional Cash ISAs and Stocks and Shares ISAs.
There are a few other savings solutions for children which should be mentioned including the National Savings and Investments’ (NS&I) Child Bonus Bonds and Index-Linked Savings Certificates. These plans also benefit from tax exemptions but differ in the terms for which they run and how the income is generated.
Having outlined the available options for child savings and their advantages, time should also be spent considering why it is beneficial to save for your child’s future.
The recent fracas that has surrounded the coalition government's revamp of the tuition fee structure has brought the issue sharply into focus for many parents who must now be wondering how they will give their children the best possible foundation to make the most out of their higher education and deal with the financial consequences when they come out of the other side. One thing that seems certain is that tuition fees are here to stay in some shape or form as all three major political parties in England at least have backed a incarnation of the fees.
For many of course, University may not be may not be the primary consideration. It could also be argued that, even if it is, should the policies surrounding tuition fees remain as they are today, the nest egg you save for your child would in fact be best used to lay the foundation for their post university lives. Therefore attention turns to equipping your children for their professional adult lives.
The current climate means that it is harder than ever for first time buyers to get onto the property market. The days of easily obtained 100% mortgages have gone and financial institutions (and the public) may be wary of them being re-introduced due to the troubles of the credit crunch and subsequent recession. The focus has really come back onto having a substantial deposit. Whilst prices have come back down to some extent they have not fallen drastically and will no doubt creep back up the stronger the economy gets. Arguably the difficulty for first time buyers to get onto the market only seems likely to increase. Meanwhile, with oil prices rising, and consequently the cost travel, food etc, there are plenty of reasons to give your children the best head start possible whn the time comes.
Having painted a slightly gloomy picture of the prospects for our future generations you may wonder whether you can accumulate an amount which will really make a difference, especially at a time when budgets are already being squeezed by the cost of living. It is worth emphasising therefore that a little amount can go a long way. The earlier you start saving for children the greater the potential for growth that those savings have. What’s more, any amount will start your child’s adult life on a positive footing rather than encouraging them to begin in debt.
There are significant tax breaks to be gained when saving on behalf of your children, although as with all such schemes there are some limits and restrictions to be aware of.
Savings accounts for children are exempt from any tax on the interest that accumulates on deposits as long as the child in question does not have a total income exceeding £6,475 for the current tax year (as with adults). However, if the money which is donated by an individual parent or step parent earns more than £100 interest in a tax year then the interest will be taxed as normal. This limit applies per parent though, so in a family with both parents present, the combined possible limit is £200 and there is even the potential for the limit to be as high as £400 if two step parents are involved. What’s more, the limit does not apply to grandparents and other adults that wish to contribute to a child’s savings plan. Therefore, these restrictions should not prevent parents and guardians from accumulating a healthy nest egg for their children which also benefits from the tax exemptions.
In addition, it is worth bearing in mind that any money placed into a child’s savings account will avoid being taxed inheritance tax providing the donor does not die within seven years of making the donation.
Whilst the Child Trust Fund (CTF) is being phased out by the coalition government, it is still a valid savings solution for many parents and their children. All children born between September 1st 2002 and January 2nd 2011 were eligible to start a child trust fund if they were paid any child benefit before January 3rd 2011. For those who have already opened an account, payments can still be made into it until the child turns 18. The trust benefits from a starting contribution from the government of at least £250 (except children who first received child benefits after August 2nd 2010 who will receive £50 only) with the possibility of further contributions for children in low income families. All income and gains from the CTF will be tax free although the contributions made by parents (or any other donors) must not exceed £1,200 in the tax year. The funds are held in trust for the child and although they can take over the management of the fund when they turn 16, they cannot withdraw funds until they turn 18 years of age. At which point they will also be able to transfer the funds to an ISA to protect the tax exempt status.
The coalitions government’s replacement to the CTF is the Junior ISA which is due to launch in the Autumn. The Junior ISA will not receive the government contributions that the CTFs benefited from however it will allow parents to save on behalf of their children and take advantage of the tax exemptions and investment choices that adults can currently benefit from with conventional Cash ISAs and Stocks and Shares ISAs.
There are a few other savings solutions for children which should be mentioned including the National Savings and Investments’ (NS&I) Child Bonus Bonds and Index-Linked Savings Certificates. These plans also benefit from tax exemptions but differ in the terms for which they run and how the income is generated.
Having outlined the available options for child savings and their advantages, time should also be spent considering why it is beneficial to save for your child’s future.
The recent fracas that has surrounded the coalition government's revamp of the tuition fee structure has brought the issue sharply into focus for many parents who must now be wondering how they will give their children the best possible foundation to make the most out of their higher education and deal with the financial consequences when they come out of the other side. One thing that seems certain is that tuition fees are here to stay in some shape or form as all three major political parties in England at least have backed a incarnation of the fees.
For many of course, University may not be may not be the primary consideration. It could also be argued that, even if it is, should the policies surrounding tuition fees remain as they are today, the nest egg you save for your child would in fact be best used to lay the foundation for their post university lives. Therefore attention turns to equipping your children for their professional adult lives.
The current climate means that it is harder than ever for first time buyers to get onto the property market. The days of easily obtained 100% mortgages have gone and financial institutions (and the public) may be wary of them being re-introduced due to the troubles of the credit crunch and subsequent recession. The focus has really come back onto having a substantial deposit. Whilst prices have come back down to some extent they have not fallen drastically and will no doubt creep back up the stronger the economy gets. Arguably the difficulty for first time buyers to get onto the market only seems likely to increase. Meanwhile, with oil prices rising, and consequently the cost travel, food etc, there are plenty of reasons to give your children the best head start possible whn the time comes.
Having painted a slightly gloomy picture of the prospects for our future generations you may wonder whether you can accumulate an amount which will really make a difference, especially at a time when budgets are already being squeezed by the cost of living. It is worth emphasising therefore that a little amount can go a long way. The earlier you start saving for children the greater the potential for growth that those savings have. What’s more, any amount will start your child’s adult life on a positive footing rather than encouraging them to begin in debt.
Wednesday, 6 April 2011
Why Save for Your Child’s Future?
The demise of the child trust fund set up by Labour in 2005 and the prospect of the Conservative-Liberal Democrat coalition’s new Junior ISA in the autumn of 2011 means that for many they will be re-assessing whether and how they will be saving for their child's future. As the cost of living seems set to continue its upward path, it is therefore worth taking a look at the benefits that still exist for putting money aside for children.
There are significant tax breaks to be gained when saving on behalf of your children, although as with all such schemes there are some limits and restrictions to be aware of.
Savings accounts for children are exempt from any tax on the interest that accumulates on deposits as long as the child in question does not have a total income exceeding £6,475 for the current tax year (as with adults). However, if the money which is donated by an individual parent or step parent earns more than £100 interest in a tax year then the interest will be taxed as normal. This limit applies per parent though, so in a family with both parents present, the combined possible limit is £200 and there is even the potential for the limit to be as high as £400 if two step parents are involved. What’s more, the limit does not apply to grandparents and other adults that wish to contribute to a child’s savings plan. Therefore, these restrictions should not prevent parents and guardians from accumulating a healthy nest egg for their children which also benefits from the tax exemptions.
In addition, it is worth bearing in mind that any money placed into a child’s savings account will avoid being taxed inheritance tax providing the donor does not die within seven years of making the donation.
Whilst the Child Trust Fund (CTF) is being phased out by the coalition government, it is still a valid savings solution for many parents and their children. All children born between September 1st 2002 and January 2nd 2011 were eligible to start a child trust fund if they were paid any child benefit before January 3rd 2011. For those who have already opened an account, payments can still be made into it until the child turns 18. The trust benefits from a starting contribution from the government of at least £250 (except children who first received child benefits after August 2nd 2010 who will receive £50 only) with the possibility of further contributions for children in low income families. All income and gains from the CTF will be tax free although the contributions made by parents (or any other donors) must not exceed £1,200 in the tax year. The funds are held in trust for the child and although they can take over the management of the fund when they turn 16, they cannot withdraw funds until they turn 18 years of age. At which point they will also be able to transfer the funds to an ISA to protect the tax exempt status.
The coalitions government’s replacement to the CTF is the Junior ISA which is due to launch in the Autumn. The Junior ISA will not receive the government contributions that the CTFs benefited from however it will allow parents to save on behalf of their children and take advantage of the tax exemptions and investment choices that adults can currently benefit from with conventional Cash ISAs and Stocks and Shares ISAs.
There are a few other savings solutions for children which should be mentioned including the National Savings and Investments’ (NS&I) Child Bonus Bonds and Index-Linked Savings Certificates. These plans also benefit from tax exemptions but differ in the terms for which they run and how the income is generated.
Having outlined the available options for Child Savings and their advantages, time should also be spent considering why it is beneficial to save for your child’s future.
The recent fracas that has surrounded the coalition government's revamp of the tuition fee structure has brought the issue sharply into focus for many parents who must now be wondering how they will give their children the best possible foundation to make the most out of their higher education and deal with the financial consequences when they come out of the other side. One thing that seems certain is that tuition fees are here to stay in some shape or form as all three major political parties in England at least have backed a incarnation of the fees.
For many of course, University may not be may not be the primary consideration. It could also be argued that, even if it is, should the policies surrounding tuition fees remain as they are today, the nest egg you save for your child would in fact be best used to lay the foundation for their post university lives. Therefore attention turns to equipping your children for their professional adult lives.
The current climate means that it is harder than ever for first time buyers to get onto the property market. The days of easily obtained 100% mortgages have gone and financial institutions (and the public) may be wary of them being re-introduced due to the troubles of the credit crunch and subsequent recession. The focus has really come back onto having a substantial deposit. Whilst prices have come back down to some extent they have not fallen drastically and will no doubt creep back up the stronger the economy gets. Arguably the difficulty for first time buyers to get onto the market only seems likely to increase. Meanwhile, with oil prices rising, and consequently the cost travel, food etc, there are plenty of reasons to give your children the best head start possible whn the time comes.
Having painted a slightly gloomy picture of the prospects for our future generations you may wonder whether you can accumulate an amount which will really make a difference, especially at a time when budgets are already being squeezed by the cost of living. It is worth emphasising therefore that a little amount can go a long way. The earlier you start Saving for Children the greater the potential for growth that those savings have. What’s more, any amount will start your child’s adult life on a positive footing rather than encouraging them to begin in debt.
Savings accounts for children are exempt from any tax on the interest that accumulates on deposits as long as the child in question does not have a total income exceeding £6,475 for the current tax year (as with adults). However, if the money which is donated by an individual parent or step parent earns more than £100 interest in a tax year then the interest will be taxed as normal. This limit applies per parent though, so in a family with both parents present, the combined possible limit is £200 and there is even the potential for the limit to be as high as £400 if two step parents are involved. What’s more, the limit does not apply to grandparents and other adults that wish to contribute to a child’s savings plan. Therefore, these restrictions should not prevent parents and guardians from accumulating a healthy nest egg for their children which also benefits from the tax exemptions.
In addition, it is worth bearing in mind that any money placed into a child’s savings account will avoid being taxed inheritance tax providing the donor does not die within seven years of making the donation.
Whilst the Child Trust Fund (CTF) is being phased out by the coalition government, it is still a valid savings solution for many parents and their children. All children born between September 1st 2002 and January 2nd 2011 were eligible to start a child trust fund if they were paid any child benefit before January 3rd 2011. For those who have already opened an account, payments can still be made into it until the child turns 18. The trust benefits from a starting contribution from the government of at least £250 (except children who first received child benefits after August 2nd 2010 who will receive £50 only) with the possibility of further contributions for children in low income families. All income and gains from the CTF will be tax free although the contributions made by parents (or any other donors) must not exceed £1,200 in the tax year. The funds are held in trust for the child and although they can take over the management of the fund when they turn 16, they cannot withdraw funds until they turn 18 years of age. At which point they will also be able to transfer the funds to an ISA to protect the tax exempt status.
The coalitions government’s replacement to the CTF is the Junior ISA which is due to launch in the Autumn. The Junior ISA will not receive the government contributions that the CTFs benefited from however it will allow parents to save on behalf of their children and take advantage of the tax exemptions and investment choices that adults can currently benefit from with conventional Cash ISAs and Stocks and Shares ISAs.
There are a few other savings solutions for children which should be mentioned including the National Savings and Investments’ (NS&I) Child Bonus Bonds and Index-Linked Savings Certificates. These plans also benefit from tax exemptions but differ in the terms for which they run and how the income is generated.
Having outlined the available options for Child Savings and their advantages, time should also be spent considering why it is beneficial to save for your child’s future.
The recent fracas that has surrounded the coalition government's revamp of the tuition fee structure has brought the issue sharply into focus for many parents who must now be wondering how they will give their children the best possible foundation to make the most out of their higher education and deal with the financial consequences when they come out of the other side. One thing that seems certain is that tuition fees are here to stay in some shape or form as all three major political parties in England at least have backed a incarnation of the fees.
For many of course, University may not be may not be the primary consideration. It could also be argued that, even if it is, should the policies surrounding tuition fees remain as they are today, the nest egg you save for your child would in fact be best used to lay the foundation for their post university lives. Therefore attention turns to equipping your children for their professional adult lives.
The current climate means that it is harder than ever for first time buyers to get onto the property market. The days of easily obtained 100% mortgages have gone and financial institutions (and the public) may be wary of them being re-introduced due to the troubles of the credit crunch and subsequent recession. The focus has really come back onto having a substantial deposit. Whilst prices have come back down to some extent they have not fallen drastically and will no doubt creep back up the stronger the economy gets. Arguably the difficulty for first time buyers to get onto the market only seems likely to increase. Meanwhile, with oil prices rising, and consequently the cost travel, food etc, there are plenty of reasons to give your children the best head start possible whn the time comes.
Having painted a slightly gloomy picture of the prospects for our future generations you may wonder whether you can accumulate an amount which will really make a difference, especially at a time when budgets are already being squeezed by the cost of living. It is worth emphasising therefore that a little amount can go a long way. The earlier you start Saving for Children the greater the potential for growth that those savings have. What’s more, any amount will start your child’s adult life on a positive footing rather than encouraging them to begin in debt.
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