INDIVIDUAL SAVINGS ACCOUNT
Synopsis: The increase to the JISA investment limit to £4,000 from 1st July offers an opportunity to re-visit tax efficient investment for higher education and first property purchase. But is a JISA the best option?
Date posted: Monday, April 07, 2014
The tax free JISA offers a simple and highly tax efficient way to invest for the benefit of one’s children or grandchildren.
But as we have mentioned in past bulletins:
- there can be no access to investments before the child reaches age 18
- at age 18 the child, in effect, secures full access to the investments
A JISA alternative which can deliver tax efficiency with control is a combination of collectives held subject to a discretionary trust.
Capital gains of up to one half of the full CGT annual exemption can be secured and up to £1,000 per annum of dividends can be received and reinvested with no further tax. If an average net yield from the portfolio of 3% per annum were secured then a trust value of about £33,000 could be reached before dividends would bear tax at an effective rate of 25% of the net dividend.
If each parent and each (of four) grandparents established a discretionary trust then up to £6,000 per annum (£1,000 per trust) could be accumulated tax free every year. The total value of the investment over 6 trusts (evenly spread) could be around £200,000.
As for any trust investment a regular review would be necessary to ensure that investment and tax efficiency is maintained.
COMMENT
The discretionary trust alternative to the JISA clearly requires more work and once reasonable values are reached then some tax may become payable. But if control and flexibility (e.g. accessing funds before age 18 and/retaining control after age 18) is required then it may be considered worthwhile.
If the fund reaches a level where tax could be payable on income produced then, subject to any adverse tax implications from reinvesting (e.g. CGT if the trust annual exemption has not been regularly used to ” re-base” the portfolio acquisition value), exit and entry charges and securing investment suitability etc, the funds could be reinvested into growth orientated or non-income producing investments or into, say, an insurance based investment bond. If the trust based strategy is to be adopted and reasonable sums are to be invested e.g. up to the JISA maximum each year then tax and investment monitoring and advice will be essential to ensure that the best outcome is secured. Advice will be essential.
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