Why ISAs could make the perfect home for a financial gift this Christmas

Investing on behalf of a child while they’re still young could be a valuable gift. Although they may not appreciate it today, your child will surely thank you later for building a solid financial foundation with their future in mind.

If you’re thinking of saving or investing for your child’s future this Christmas or Hannukah, you might be keen to do so tax-efficiently. Perhaps the most popular tax-efficient vehicle for doing so is an Individual Savings Account (ISA).

There are four types of adult ISA and one designed for under-18s, called a Junior ISA (JISA).

MoneyWeek reports that thanks to savvy investments made by parents and grandparents, there are now more than 2,000 JISAs worth £100,000 or more, with the most valuable accounts standing at more than £750,000. What’s more, MoneyWeek also reveals that the number of adult ISA millionaires has tripled in the last three years.

Continue reading to discover how the strategic use of ISAs could help you build wealth for your child’s future.

You can pay up to £9,000 a year into your child’s Junior ISA

As of the 2024/25 tax year, you can pay up to £9,000 a year into your child’s JISA.

Much like adult ISAs, you can open either a Cash JISA, a Stocks and Shares JISA, or one of each type of account. The £9,000 annual subscription limit counts across all JISAs, and is in addition to the £20,000 contribution cap across adult ISAs. When your child turns 18, their JISA will become an adult ISA.

Funds held within a JISA can also grow free of Capital Gains Tax (CGT), Income Tax, and Dividend Tax – so when the time comes for your child to withdraw their funds, they won’t pay tax on the money they take out.

Compound returns could help to provide your child with a tax-efficient pot of money when they turn 18

Remember: a little goes a long way. Even if you can’t pay the full £9,000 a year into a JISA, this doesn’t mean you can’t make a difference to your child’s future.

Imagine that you open a Stocks and Shares JISA for your 10-year-old child or grandchild today. You invest £2,000 a year within the JISA until they’re 18 – a total of £16,000 over eight years. Assuming a 5% annual return with dividends reinvested, the funds would be worth £22,686.35 when your child reaches age 18.

In adulthood, your child could use these funds to:

• Support themselves while studying
• Buy their first car
• Put down a deposit on their first home
• Continue saving for their future.

What’s more, the beauty of compound returns means that even if your child can’t continue to match the contributions you originally made after they take over their ISA, their money may still grow.

Imagine that your child begins their adult life with a £22,686.35 nest egg and continues to contribute £100 a month into the pot for a further five years – a total addition of £6,000. Assuming a 5% annual return with dividends reinvested, their savings would now be worth £35,943.67. The returns on the entire value of the pot would actually be higher than the amount they put in over five years, thanks to compounding returns on your initial investment.

Your adult children could benefit from alternative ISA investments this Christmas

You may have children who are over 18, in which case JISAs wouldn’t be an available option. In this instance, you could consider:

• Paying into your child’s Lifetime ISA (LISA). A LISA is designed specifically for first home purchases or saving for retirement. With a £4,000 a year subscription limit, making up part of the overall £20,000 cap for adult ISAs, each LISA contribution receives an additional 25% top-up from the government. Routing funds into your child’s LISA ahead of purchasing their first home could help them to maximise the deposit they put down.
• Adding cash to your child’s Cash ISA. If your child is building up savings for a travel experience, for example, adding funds to their Cash ISA could help them build their savings tax-efficiently.
• Gifting funds for your child to invest within a Stocks and Shares ISA. Your child might be new to investing, and if so, their Stocks and Shares ISA may benefit from a tax-efficient boost.

It’s wise to keep total financial gifts offered to adult children at a maximum of £3,000 a year. This is known as your annual exemption, and as of the 2024/25 tax year, is the amount you can offer as a financial gift without this wealth being potentially caught by Inheritance Tax (IHT) later on.

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Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.