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Baby, one more time

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&#39s 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&#39s 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

gains.

Before leaving children&#39s 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.

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