How To Strategically Build Wealth For Your Children

Knowing how to build wealth for your children is a thoughtful way to secure their financial future and help them achieve their long-term goals. A Custodial Roth IRA is an excellent tool to provide them with tax-advantaged growth and a strong financial foundation.

Opening a junior investment account can provide them with a solid foundation as they transition into adulthood and navigate the financial complexities that come with it.

There are two key investment vehicles that are most common for investors who want to build wealth strategically for their children. The two accounts include a Junior Individual Savings Account (Junior ISA) and a Junior General Investment Account (Junior GIA).

Understanding how these accounts operate and their respective benefits is key to making informed decisions about your child’s financial well-being. Read below to find out more about them.

Junior Isa: Tax-Efficient Savings

A Junior ISA is a specific investment account designed for children under the age of 18. This tax-advantaged savings account allows you to grow your child’s savings whilst sheltering them from income tax and capital gains tax (CGT).

There are two main types of Junior ISAs – a cash Junior ISAs and a stocks and shares Junior ISAs. The former is for growing your child’s savings with regular contributions, and the latter allows investments in the stock market to build your savings with potential returns.

As of the current tax year (2024/25), you can contribute up to a limit of £9,000 per child into a Junior ISA. This applies to contributions across both types of ISAs in the same tax year.

Only a parent or legal guardian can open a Junior ISA on behalf of a child, but once opened, anyone can contribute. Once the child turns 18, the account will convert to a standard ISA and they can access the funds.

Junior Gia: Flexibility Through Bare Trusts

A Junior GIA is an investment account that’s established through a ‘bare trust’. This means it’s opened and managed by trustees – often parents or grandparents – on behalf of the child (beneficiary).

Unlike Junior ISAs, Junior GIAs have no annual contribution limit, making them particularly advantageous for those wishing to invest substantial sums for their children. On top of that, trustees have the authority to access and utilise the funds at any time for the child’s benefit – even before the child turns 18. This is ideal for financial needs such as covering educational expenses.

However, it’s important to note that returns within a Junior GIA are subject to taxation, unlike Junior ISAs. That being said, you can utilise your child’s annual personal allowances to help mitigate the impact of income tax and CGT on returns.

Strategic Considerations For Building Wealth

When deciding how to strategically build wealth for your child, here are some things to consider.

• Contribution limits: Junior ISAs have an annual cap of £9,000, so if you’re investing here, it’s important to make the most of the allowance each year. Junior GIAs impose no such limits, allowing for more substantial investments.
• Tax implications: Junior ISAs offer tax-free growth, so can be beneficial for maximising returns each year. Junior GIAs are subject to taxation, though utilising the child’s tax allowances is a key strategy to mitigate this.
• Access to funds: Plan ahead to know your child’s future goals, as this is important for knowing whether funds will be needed before the child turns 18. Junior ISAs are inaccessible until the child turns 18, but Junior GIA funds can be accessed by trustees at any time for the child’s benefit.

By thoughtfully selecting and managing these different child investment accounts, you can create a more robust financial foundation for your child, giving them the tools they need to pursue their aspirations with confidence.

Please note, the value of your investments can go down as well as up.