The tax loophole that lets parents stash £36,000 into an Isa in a single year

New research has uncovered a once-in-a-lifetime loophole that allows parents to stash away as much as £36,000 into their child’s savings account in a single year – completely free of tax. 

This is quadruple the usual £9,000 annual limit on contributions made into a Junior Isa or “Jisa”, a tax-free savings account that lets parents save for their children’s future.

Laura Suter of stockbroker AJ Bell called the £36,000 tax-free saving – which exists thanks to a quirk in the tax system – “one of the most generous savings limits out there.” 

She added: “A clash between how the rules differ between Child Trust Funds and Junior Isas, plus the generous £9,000 annual allowance per child, means that parents can exploit the loophole to save a huge amount of money in 12 months.” 

David Gibb of wealth manager Quilter said: “While this method will only work for some, you could give your child a huge boost for later life if you can afford it.”

Child Trust Funds were long-term savings accounts established under New Labour that were offered to most children born between 2002 and 2011. Many are invested in stocks and shares. 

They currently hold £10.5bn worth of savings, according to the National Audit Office, and many people, now adults, don’t realise they have money stashed away. 

If a child holds a CTF, then up to £9,000 a year can be paid into this account. Unlike Jisas, the allowance for a CTF renews on the child’s birthday, not the tax year. This means you can put £18,000 away for a child during the tax year – £9,000 just before their birthday and £9,000 after their birthday.

The CTF can then be transferred into a JISA. Once this is done, the parents can then make the usual £9,000 contribution into the Jisa, bringing a total of £27,000 in their Jisa. 

At the start of the tax year in April, the parent can then use the new allowance to funnel a further £9,000 into the account, taking the total to £36,000. 

Isas are one of Britain’s favourite ways to save because anything inside an Isa, whether savings or investments, grows free of savings, capital gains and dividend tax. Withdrawals are also tax free. 

A caveat with this tax hack is it cannot be used by children born just before the end of the tax year on April 5 because their parents are unlikely to have enough time to make the second CTF contribution, switch the account to a Jisa and make the first Jisa contribution all before the tax year ends.

“But for anyone not born at the start of April it makes a pretty attractive wheeze,” Ms Suter said. 

If you are considering opening a Junior Isa for your child, then one question you need to ask yourself is whether to open a Junior cash Isa or a Junior stocks and shares Isa. 

The younger your child is, the more likely it is that their savings will ride out the volatility of the stock market and deliver better returns. 

“Considering the long-term horizon, even modest investments can compound into significant wealth, thanks to the power of time and consistent returns,” Mr Gibb said. 

If a parent managed to save the full £9,000 Isa allowance every year into a Junior cash Isa paying a 1.5pc interest rate, then by the time the child turned 18, the account would be worth £187,170. 

However, if they paid the same amount into a Junior investment Isa with a not-unreasonable average investment growth of 5pc per year after charges, then they would have a £265,851 pot to gift their child on their eighteenth birthday. 

Tim Stovold of accountancy firm Moore Kingston Smith said: “All of this comes with the health warning that this pile of cash can be withdrawn by the child when they reach age 18 so, while this is a tax efficient way of investing money within a tax exempt wrapper, if you are worried that the whole sum will be blown on a post A-Level holiday to Ibiza, it could be more sensible for the parents to hang on to the cash.”