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I ended last week&#39s article on what I thought was a fairly upbeat note, namely, that it is possible to plan tax-effectively for your children&#39s or grandchildren&#39s future.

Renewed interest in planning for children has been triggered by the Government&#39s recent announcement on the proposed child&#39s trust fund. Admittedly, it is hard to beat Government funding when it comes to improving the attractiveness of an investment but it is also worth remembering that, if approved pensions are anything to go by, such fiscal help usually comes subject to conditions.

Looking at the pension and Isa models, these conditions are usually manifested in constraints over the amounts that can be withdrawn from such favoured arrangements, the form of benefit withdrawals and, especially where the objective is long-term investment, the time at which benefits can be withdrawn.

We shall have to wait and see what form the child&#39s trust fund will take. But the fact is that we do not have to wait for tax-effective methods of saving for children. We already have an excellent choice.

Last week, I mentioned Isas – obviously, not designated for a child&#39s benefit but held by the parent with the objective of providing funds, say, to help meet the costs of further education in the future – and growth-orientated collectives that are designated or held on bare trust for the benefit of children.

The reason, from a tax standpoint, to focus on capital growth is that there is a good chance this growth will be received tax-free.

A bare trust or designation (effectively, the barest of trusts) will ensure that the capital gains will be treated as those of the child and not those of the settlor. The anti-avoidance provisions applicable to income from capital settled by parents do not apply to capital gains from such capital, which opens up this very attractive solution.

Those of you interested in friendly society plans will also be aware of the very specific children&#39s plans into which up to £270 a year or £25 a month can be invested into a completely tax-free fund for the child&#39s benefit.

It may be that investments in these plans form the first slab of a tax-effective investment portfolio for children to be topped up (once the limits are exceeded) by designated collectives or collectives held in a bare trust.

Subject to the investment issues, collectives founded on zeros may be worth considering. Producing all capital gains and no income makes eminent tax sense and also keeps the administration of the arrangement so much easier.

Avoiding the comparative nightmare of trust income belonging beneficially to one person (the beneficiary) but being taxed on another (the parent if it exceeds £100 gross in a tax year and the beneficiary is unmarried and under age 18) is most certainly to be strived for, all other things being equal.

It is also worth remembering that, for long-term investment, capital gains tax taper relief can reduce capital gains substantially. Importantly, the annual exemption applies after the gains have been reduced by taper relief. So, if full taper relief were available and the available annual CGT exemption were at its current level of £7,500, tax-free gains of £12,500 could be made by each individual each year.

Life insurance policies and, in particular, offshore life insurance policies can also have a role to play in tax-effective planning for the costs of children&#39s education. A segmented offshore bond held by a parent can offer substantially, if not entirely, tax-free growth.

When funds are needed, an appropriate number of segments can be assigned tax-free – there being no chargeable event arising by virtue of an assignment for no consideration – and then encashed by the child.

Of course, the beneficiary needs to be 18 or over to give a valid discharge but, subject to this, the beneficiary then has the scope for encashment with gains falling within any unused personal allowance and/or the 10 per cent tax band.

So, far from tax-effective investing for children being a forthcoming attraction, it is very much a here and now opportunity that any adviser with parents or grandparents in his or her client base ought to capitalise on.


Scottish Equitable International – Government Bond Fund

Tuesday, 22 May 2001.Type: Offshore life fund.Aim: Growth by investing in UK government bonds.Minimum investment: £15,000.Place of registration: Luxemburg.Investment split: 100 per cent in UK government bonds.Isa link: No.Charges: Annual 1 per cent.Commission: Initial 5.25 per cent.Tel: 0131 339 9191.

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