This week, I will continue my look at investment strategies for the benefit of children.
Another disadvantage of nominee (or designated) accounts is that any income arising is always treated as the child's income, which means that the parental settlement provisions apply to assess tax income on the parent if it exceeds £100 gross in a tax year, the child is under 18 and not married and the capital to fund the investment originated from the parent.
If active investment management is planned or a client wants to take advantage of tax planning opportunities, it will usually be best to execute an express trust.
A trust account means that the account/investment holder is not any particular individual but the trustees, for example, “XY and Z, etc, as trustees of the settlement…”
So, generally, which investments are available?
Under current legislation, Isas are only available to individuals aged 18 or over although cash Isas are available for 16 and 17-year-olds. Neither are they available to trustees of a trust. Of course, there is nothing to stop any particular individual taking out an Isa with a view to using the proceeds for a particular purpose, namely a child's benefit.
It is possible for anybody to provide funds to be contributed to a stakeholder pension for a child. The obvious disadvantage of saving through this vehicle is that no funds will be available until the beneficiary is aged 50 and that benefits have to be taken in a particular form.
National Savings children's bonus bonds
The bond is issued for a particular child and the child becomes absolutely entitled at the age of 16. No trusts are necessary.
Unit trusts, investment trusts and Oeics
In most cases, these investments would be made by those over the age of 18 on behalf of the child. It would be unusual for the investment house to knowingly accept an investment direct from a minor child as they could not get a valid discharge for payment of the cash value of the investments.
Moreover, all the inherent risks of contracting with a minor (particularly as the child would have the ability to repudiate the contract at 18) would be present.
The system of designated accounts is one way of dealing with this problem. Legally, such an arrangement would normally be construed as a bare trust.
A preferable alternative would be for the donor to create an express trust and for the trustees to invest for the benefit of the child.
Life insurance policies generally
Leaving aside the special position of friendly societies, some insurance companies may take a commercial risk and allow children old enough to understand the contract, say, from age 14 or 16, to propose for their ordinary savings plans.
Apart from the few offices having statutory authority to write business for children (including friendly societies), in all other cases, there is the risk of the child repudiating the contract before or at a reasonable time after reaching 18.
Another well used method of providing life insurance benefits for children is to write policies in trust. A simple form of statutory trust, (one written under the Married Women's Property Act), is available to individuals effecting policies for the benefit of their own children.
Non-statutory trusts would normally be available in other circumstances or where greater flexibility is desired than provided under the Married Women's Property Act.
Sometimes a special type of policy referred to as “child's deferred insurance” can be effected. Such policies are normally written initially on the life of the parent and proposed by the parent, with the child becoming entitled to the cash sum at a future date.
Alternatively, the cash sum would be transferred as the first premium for a policy on the life of a child, say, on the child becoming 18.