There’s something that I’ve always found a little bit hard to get comfortable with when thinking about saving for my children. I’m comfortable with the money being in her name, but locking it up till she’s 18 has stopped me from putting as much money as I would’ve into their JISAs (Junior ISAs)). What if there’s something that we want to use that money for earlier? School trips, private school fees, driving lessons/first car, music lessons? The list goes on.
These are all expensive things that happen before a kid turns 18, and they tend to be funded straight from the parent’s pockets’ — especially if all the money you’re saving for them has been locked into a JISA. This normally leaves 3 options:
- Pay for it with any spare money you have (which can cause huge stress on your life for some of the larger costs)
- Save it in a kids saving account so you can withdraw it whenever you want (but it seems silly to earn 1-2%ish on long-term savings)
- Invest in your own ISA (tends to be used for other things that benefit the parents and not the child)
I want to open your eyes to a fourth option that’s less well known, especially if you don’t have a financial adviser. A Bare Trust.
What is a Bare Trust?
Very simply put, a Bare Trust is one where the beneficiary (your child in this case) has a right to all the money in the trust when they reach 18, but you can use it earlier — provided that the money is used for their benefit.
The main differences between a JISA and a Bare Trust are:
- Flexibility to withdraw the funds from the trust before your child reaches the age of 18 if the purpose is for the child’s benefit.
- The money doesn’t automatically go to the child at 18 (but can they request it)
- It’s not tax-free, but the Bare Trust can utilise the child’s capital gains and income tax allowances.
For this post, I’m going to focus on capital gains tax and the differences between a JISA (locked up till 18) and a Bare Trust (flexibility but potential tax implications).
Capital gains tax
Like us, children also have a capital gains tax (CGT) allowance each year. For this tax year (22/23) the allowance is £12.3k. To keep things simple I’m going to assume that it stays at that figure for the next 18 years, but keep in mind that this may change in the future.
So this means your child only ever has to pay tax if you sell the investments and makeover £12.3k profit in a single year. How likely this is to happen really depends on how much you save and invest for them each year and how much you withdraw in a given year. I’m going to run through some examples to show you that despite the investments being taxable, it really only comes into play for larger amounts (keep in mind that these are examples and how you’re taxed will depend on your individual circumstances and that could change in the future).
You invest £65 a month from the day your child is born and you get an average annual growth of 5% over the 18 years. In this example, your total balance would be around £22.5k by the time your child turns 18.
Your profit of £8.5k, however, would be below £12.3k annual CGT allowance, even if you withdrew all of the £22.5k money in one go just before the child’s 18th birthday.