Does The 2015 Budget Turn The Tables?

Posted by David G. Evans

Big changes for savers announced by the UK Chancellor and at first read HootLoot is encouraged, but not as much as we would like.

HootLoot UK Budget

The headline grabbing "First £1,000 of saving income will not be subject to income tax" is a crowd pleaser. Great for adults; if you are earning 3% on your savings this means the interest on up to £33,333 of savings will be tax free. Further the introduction of a Flexible ISA allows you to temporarily move money in and out without losing previously accumulated tax free allowances. 

All sounds good, but what about children?

Children are generally taxed the same way as adults and have the same tax free allowances. In theory this implies there is no need for a Junior ISA (JISA). Children can hold money in a bank account and receive up to £1,000 p.a. of interest income before they are liable for tax. (btw…. If your child has sufficient funds that the £1,000 allowance doesn’t help, we’d like to have a conversation with them about a great investment opportunity in a website). 

Unfortunately it's not that simple - HMRC prevents parents putting income into their children’s names to avoid tax. Only £100 of interest income is tax free, the remainder being taxed the same way as the parent (i.e. at the marginal tax rate). (See here for further details).

Turning the tables

This potentially creates a situation where it may now be more efficient for parents to hold money on behalf of children. Parents will have the £1,000 income allowance on ordinary savings plus the opportunity to hold money in an ISA that soon will have the flexibility to move money in and out.

This arrangement overcomes the JISA issue should a child need access to funds prior to their 18th birthday, or alternatively if mum and dad are concerned about what happens when junior turns 18 and is legally entitled to “invest” their savings as they see fit. (read: parties, shopping; holidays). 

This idea obviously won't work if parents intend to use all of their allowances for their own money. Further adults can only move money out and in within the same tax year otherwise they will loose their allowance.

Cash or Stocks &  Shares

However it raises another point - the budget proposal only seems to apply to Cash ISAs. HootLoot’s view is that cash is a suitable investment in some circumstances but not others. For children we argue that stocks and shares may be a better long term investment (see here for more), whereas for adults it is very much dependant upon the circumstances.

In this case, the budget doesn't really change much. The taxation of capital gains on shares for children is the same as for adults. The complexity of managing a share portfolio outside an JISA needs to be evaluated on a case by case basis, but for most the JISA will be the path of least resistance.

The Buy-to-Help ISA

The budget also announces the "help-to-buy ISA” for adults. When JISA’s are converted into ISAs upon the age of 18, the potential benefit of a 25% matching up to £15,000 (£12,000 + £3,000) should not be dismissed. However despite being born in London and living on Downing Street, the Chancellor can’t be thinking of help-to-buy in relation to London property, other than legal fees and survey costs.

As more details come to light, we’ll keep you posted.


One last point….  Cynically we would question the real value of the £1,000 tax free threshold. Interest rates are so low that interest income is almost non existent for the balances in most deposit accounts. Where savings are larger, they tend to be sheltered in ISAs or wrapped into products such as offset mortgages.

But who wants to be a cynic? 



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