Child's play- Cash ISA or Junior ISA? A taxing issue!
Date:
28 November 2013
Cash ISAs have been available for young adults over the age of 16 for a few years now. At the moment, an individual aged over 16 can pay up to £5,760 of their own funds, each tax year, into a tax free Cash ISA. However, if a parent of a child between the age of 16-18 has gifted the money to the child in order to open the account, then more care is needed as section 629 of the Income Tax (Trading & Other Income) Act 2005 may come into play. This legislation states that any gross income earned on an account or an investment, which exceeds £100 in any one tax year, may be assessed on the parent instead of on the child.
This section is basically a tax anti-avoidance rule - "the £100 rule" as it is sometimes known, will apply where a parent gifts money to a child to enable them to invest in an ISA, or in any income producing account. This means that a parent could end up being taxed on the interest arising in a cash ISA, even though the original interest would have arisen in a tax-free environment. The parent is then obliged to report such income to their tax office. It is worth noting that where the funds have been gifted by an grandparent, this rule does not apply.
The situation with a Junior ISA is somewhat different however, in several important respects. For example, the choice of investments is wider - cash, stocks and shares or any mix of the two. Eligibility wise, the Junior ISA is available for any child under the age of 18 who does not have a Child Trust Fund account, that is to say, a child who was born before 1 September 2002 or after 2 January 2011. The upper annual limit for contributions, for the current tax year, is set at £3,720, which is lower than the Cash ISA allowance, however the section 629 rule does not currently apply to this type of investment and a parent can therefore fund the Junior ISA on behalf of the child without the income being assessed on their own income.