This week, I would like to interrupt my series of articles on employee
share schemes to consider the latest Government attempt to raise public
awareness on the importance of starting saving early.
This has come in the shape of the Child Trust Fund and the Saving Gateway.
Both these have come relatively hard on the heels of the opening up of cash
Isas to 16and 17-year-olds and both should have a far wider audience than
the cash Isa extension, which was generally agreed to be fairly unexciting.
The proposed Child Trust Fund will provide a cash lump sum at birth that
has been contributed entirely by the Government. The initial sum will be
£250 with special birthday top-ups of £50 provided by the
Government at ages five, 11 and 16.
If the child is a member of a low-earning family (probably earnings of
less than £200 a week) then the sums contributed by the Government to
the fund at outset and at ages five, 11 and 16 will be double those under
the ordinary allowance.
The Government will permit additions to the fund to be made by anybody
else for the child's benefit.
At this stage, the Treasury has not determined what the tax treatment of
the funds should be nor how the funds should be invested although it is
widely anticipated that the emphasis will be on caution. One may not be
too surprised to see some form of Catmarking implemented for these funds.
It is hoped that the details surrounding the structure of these funds will
not be excessive but, given their objective, one would expect to see some
form of limitation on access and withdrawal in order to increase the
chances of the objective of long-term saving for a “financial start in
life” being achieved.
With the ever increasing costs of further education showing no signs of
abating and the continuing limitation on the extent to which individuals
can rely on the Government to provide financial assistance, the proposed
release date at age 18 might not be inappropriate. No doubt such a
limitation could be contained in the trust terms – not unlike those
applying when shares are held in employee share schemes.
The tax rules, when published, will need to take account not only of the
taxation of the sums contributed by the Government but also income and
gains arising from amounts invested by others. Where parents make
contributions, a decision will need to be taken on the application or
otherwise of the anti-avoidance rules. If they apply, these would operate
to result in the assessment of all income on the parent if the income
arises from a sum settled by the parent for the benefit of a minor
unmarried child and the grossed-up income produced in a tax year from
settlements or gifts by that parent exceeds £100 in a tax year.
At current interest rates, however, one would need capital in the order of
£2,000 to cause a problem under this rule which, if it were to apply,
would hopefully not apply to any sums given by the Government.
Should these proposed trusts be excluded from these anti-avoidance rules
on income, they could form a tax-attractive home for parental savers as
well as for parental savers seeking to benefit children. But such an
exemption would surely come at some cost in terms of flexibility and access.
Ordinary private trusts in bare or nominee form already offer the
opportunity to use the child's capital gains tax exemption each year
regardless of who the settlor is, parent or otherwise. The parent could
also be the trustee. These trusts are, however, caught by the income tax
anti-avoidance rules where the income exceeds £100 gross in a tax year.
Children cannot have stocks and shares Isas but ordinary collectives (unit
trusts, Oeics or investment trusts) held on bare trust for children can
give the same capital gains tax advantages for gains up to the annual
exempt amount. Remember, taper relief also applies to reduce long-term
Before leaving children's investments, it is also worth remembering that a
parent can also apply and pay for a stakeholder pension for a child for an
amount of up to £2,808 net in each tax year with basic-rate tax relief
added by the Government to give a total gross investment of £3,600.
I will continue my look at the investment choices open to parents and
other friends and relatives for the benefit of children next week and also
take a look at the proposed Saving Gateway for low-income earners.