Parents can maximise savings for their children (Image: MTStock Studio via Getty Images)
A few weeks into the new tax year, Brits across the country are beginning to make the most of their fresh ISA allowances. However, it turns out that for parents whose child is turning 18 this year, there’s a little-known trick that could give their youngster a significant boost to their savings pot.
Antonia Medlicott, founder and managing director of financial education specialists Investing Insiders, has revealed how you can make the year your child turns 18 one of the most financially rewarding savings years possible, by capitalising on the ISA benefits on offer.
She said: “Before your child turns 18, you can set them up a junior ISA, with these accounts having a tax-free contribution limit of £9,000. Once your child turns 18, their junior ISA converts into a full adult ISA account, with all the benefits that brings.
“However, what many people don’t realise is that it includes the £20,000 ISA allowance, regardless of how much money has been invested into their junior ISA that same tax year. This means that, in the year your child turns 18, they effectively have £29,000 of tax-free ISA contributions to take advantage of. For example, if their birthday was November 14, you’d have up until November 13 to invest £9,000, then the £20,000 allowance would kick in from the birthday.
“If you contributed the full £9,000 into the junior ISA each year, then contributed £29,000 in total in the year your child turns 18, you’ll have deposited a total amount of £182,000 tax-free. If the account has an average of 7% annual growth, that pot could be worth around £348,000 by their 18th birthday, all sitting within that tax-free account.
Antonia Medlicott (Image: Investing Insiders)
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“Making the most of this one-in-a-lifetime year can create a savings pot that can mature for years to come, and see your child financially protected as they make their way through life. Unfortunately, this additional allowance cannot be carried forward, so maximising its benefit should be something for parents to consider.
“HMRC has confirmed that these limits will be frozen until at least 2030, so parents who have a child turning 18 before this point can still take advantage of this event.”
What to bear in mind when gifting cash
Antonia said: “As turning 18 is often an event which sees monetary gifts from parents and grandparents alike, knowing that the increased £29,000 limit is there in advance can be hugely beneficial to plan for.
“Most people don’t realise this advantage until the year that it occurs, and being aware of it beforehand can allow you to get ahead in maximising those savings.
“Because you’ll be dealing with larger sums over the year if you’re aiming to maximise this deposit, it’s a good idea to have a parent keep a running total of everything going into the account. It can be difficult to keep track of everything if money is coming into the account from multiple sources, and the last thing you want is to be caught out by HMRC charges.
“For grandparents looking to add to the account, contributions should be kept in mind when inheritance planning. Gifts over the annual £3,000 gifting allowance remain part of your estate for seven years for inheritance tax purposes, so sums larger than this may be liable for IHT during this period. Because of this, grandparents who want to make these kinds of contributions may want to discuss them with a financial adviser.”