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Gainful investment

Last week, I focused on proposals in the Chancellor&#39s pre-Budget report to allow 16and 17-year-olds to invest up to £3,000 a year in a cash mini Isa or the cash component of a maxi Isa.

In order to combat investments for minor unmarried children being funded by parents and, in this way, side-stepping the provisions of section 660B ICTA 1988, provisions will be introduced to ensure that if a parent gives a child funds to invest in an Isa and the investment income arising on all gifts from that parent to that child in the year exceeds £100, then all the investment income will be treated as that of the parent for tax purposes.

However, if interest rates are at, say, 5 per cent a year and no other income is produ ced in the year for the donee child from gifts made by the donor parent, the parent could give up to £2,000 to the child to make the cash Isa investment. The interest from that would amount to £100 a year and would be tax-free.

Clearly, there would be no tax advantage where the child is a non-taxpayer and gross interest in an ordinary acc ount could be certified. While considering investments for children, it is worth remembering that there are no anti-avoidance provisions with regard to the annual capital gains tax exemption.

Parents could therefore invest on behalf of their child through, for example, designated unit trusts or Oeics to ensure the child&#39s CGT exe mp tion is used.

An easy way of ensuring this opportunity is taken is for a parent to invest in, say, growth-orientated collective investments, for example, unit trusts, investment trusts or Oeics, so that the combination of taper relief and the annual exemption ensures that, over the long term, no CGT is pay able on the gain.

This could be an attractive way of funding for the increasing costs of further education. Clearly, as for all savings, the most effective results will be secured if inv estment can be made over a relatively long period.

The designated account route is one that necessitates a willingness to give up beneficial access to the investment used in the strategy from the outset. The gift would normally be exempt for inheritance tax purposes or, to the extent it is not exempt, constitute a pot entially exempt transfer.

Where the donor does not wish to make an immediate gift of the assets in question, perhaps because he or she wishes to maintain access to the funds, then a deferred gift of a collective investment will trigger a potential CGT liability on the donor when the gift is actually made, for example, when the child enters into further education.

The assignment of the collective investment at that point will be a disposal for CGT purposes with the market value rule imposed to determine the amount of the gain. All gains and income on the non-designated collective would be assessed on the parent during the period of his or her ownership, that is, up to the point of assignment.

For this type of investor, serious thought should be given to, say, a non-UK investment bond with an assignment of sufficient segments to the child when the costs of further education are to be incurred.

The assignment would be for no consideration and so would not give rise to a chargeable event and any gains arising on subsequent encashment by the student would be assessed on the student. Any available personal allowance, 10 per cent tax band and basic-rate tax band would, in most cases, help to keep tax to a minimum.

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