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Child&#39s play

When planning to provide for the financial future of children, once we move beyond the tax-free environment offered by tax-exempt friendly society plans and Isas, we move into the world of collective or non-exempt insurance wrappers. Regardless of whether the investments are offered by UK or non-UK companies, the choice for long-term saving for the benefit of children is as uncomplicated as when one is saving up for any purpose. Suitability will revolve around the same factors as are at play when looking at individual investments where the purpose is not long-term saving for children.

But there are a couple of extra factors to bear in mind that can help to deliver a better, more bespoke solution for a particular individual.

Perhaps the key question to ask in determining the structure of a plan is the extent to which the investor wishes to retain access to and control over his or her investment. If the answer is a very positive “total access”, then this is telling you that any form of designation or trust is probably inappropriate. Of course, the individual should have explained to them the benefits of a trust or designation in the shape of moving assets outside of one&#39s estate for inheritance tax purposes and even the protection offered from creditors.

However, if after this explanation the individual is happy that requirement for access overrides these other considerations, then one is left with a simple investment choice based on suitability on tax and other grounds for that particular individual. It is, however, worth looking ahead to what is possible in the future when some conveyance of benefit may be made.

The fundamental difference here between collective investments and insurance-based investments is that, when an individual seeks to transfer a collective investment to another individual for no consideration, then it is likely that the disposal will constitute a chargeable disposal for capital gains tax purposes, with the disposal price being the market value. Unless the transfer of asset is made into a discretionary trust, there is no scope to hold over the capital gain and the gift of the collective investment will potentially give rise to a capital gains tax charge.

Of course, this may well fall within the transferor&#39s annual exemption but, if it does not, then tax may be payable and it is important to remember the beneficial effect that taper relief can have. Taper relief is applied before the annual exemption is used. However, the point is that the gift could give rise to a capital gains tax liability. The gift would also constitute a disposal for inheritance tax purposes but would normally be potentially exempt.

The benefit of an insurance product in this context is that an assignment of an investment bond, for example, or some policy segments under an investment bond could be made without triggering any tax charge. The policies would then be moved into, presumably, a lower tax environment and subsequent encashment may minimise the tax liability.

If the insurance product happens to be an offshore bond then, all other things being equal, growth will have occurred in a more tax favourable environment and, if the assignee has an intact personal allowance and/or 10 per cent tax band, then the full benefit of this strategy of may be realised.

Where the investor is happy for the investment to be in the beneficial ownership of the donee from outset, then, for collective investments, a designation of the investment for the benefit of the beneficiary may be appropriate, as may a bare trust. Tax complications can arise if other than a bare trust is used although, provided the right selection of underlying investment takes place or the settlor and trustees are happy to actively manage, identify and deal with income arising, this should not be an impediment.

For life policy-wrapped investments, trusts are a natural solution. Many life offices offer a full range of draft trusts to wrap their UK or non-UK life products. As should be relatively well known by UK practitioners, there are no parental/minor unmarried donee anti-avoidance provisions when it comes to a life insurance-wrapped investment being the only underlying asset of a trust, regardless of the type of trust.

When a chargeable event gain is made under a policy held in trust, the rules for the assessment of chargeable event gains apply, regardless of the relationship between settlor and beneficiary. Broadly speaking (purely as a reminder, you understand) where a policy is held in trust for a minor beneficiary, then, regardless of the nature of the trust, all gains made under that policy are assessed on the settlor if alive and UK resident.

However, where the settlor is non-UK resident or deceased (except for the tax year of his death, when gains are assessed on him) then chargeable event gains will be assessed on the trustees. The trustees&#39 rate is34 per cent although, if the policy is a UK policy, they would qualify for the basic-rate tax credit. If the trustees are non-UK resident, then the gains will be treated as income for the purposes of section 740 ICTA 1988 capable of attribution to UK ordinarily-resident beneficiaries to the extent that they receive any funds from the trust.

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