Tax-efficient investments for children mean taking advantage of a child’s personal allowances and capital gains tax annual exemption.
Here, I would like to examine some tax-efficient investment strategies that can be used by parents and grandparents with the foresight to think about funding for significant future expenditure, whether that be school fees or helping someone get on housing ladder.
There are opportunities to take advantage of a child’s personal allowances and capital gains tax annual exemption when investing for them.
However, when parents make gifts for the benefit of their own minor, unmarried children, not in a civil partnership, greater care is needed in finding a solution given the anti-avoidance rules that exist. These involve assessing income to tax the parent if income generated from gifts to a minor, unmarried child, not in a civil partnership, exceeds £100 gross in a tax year.
This may be achieved with some non-income producing investments or with certain types of trust.
Let us look first at investing in the name of the child. In some cases, it may be possible, and desirable, to invest money that belongs to a child as of right (i.e. where there is no trust) in their own name. There are a number of options to consider in these circumstances:
Bank or building society accounts
The age at which a child can open a bank or building society account varies from institution to institution. However, where larger sums are involved, accounts would usually be opened either as designated accounts or trustee accounts. Legally, a designated account will normally be construed as a bare trust. However, the person who created the trust might have to demonstrate (to their inspector of taxes, for example) a clear intention to make an irrevocable gift.
Remember, if the originator of the funds was a parent of the child then the income, if it and other income derived from gifts from the same parental donor exceeds £100 gross in a tax year, will be assessed on the parent and so no tax saving will be secured.
Junior Isas were made available from 1 November 2011 for any child under 18 years of age who is UK resident and does not hold a child trust fund account.
Junior Isas permit up to £4,128 per child for 2017/18 to be invested in a cash account and/or stocks and shares by any one or more persons for tax-free accumulation of income and capital until age 18 when it will convert to an ordinary Isa. Remember, the child can secure unconstrained access to the funds invested at age 18.
It is possible for anyone to contribute to a registered pension plan for a child. The obvious disadvantage here is that funds will generally be unavailable until the beneficiary is aged 55. That said, this could also be an advantage.
Most importantly a net annual contribution of £2,880 would generate tax relief of £720, making a total investment of £3,600. This contribution is the gross annual amount that can be paid to a registered pension on behalf of a relevant UK individual who has no relevant UK earnings.
National Savings & Investments Children’s Bond
This bond is issued for a particular child but controlled by the child’s parent, guardian or (great) grandparent until they reaches age 16. No trusts are necessary. The bond is designed to be held for a fixed term of five years but can be cashed in early subject to a penalty equivalent to 90 days interest on the amount cashed in.
At the end of the five-year term, the funds can be reinvested in another NS&I account or investment if desired. The maximum investment is £3,000 per child in each issue of the bond. Interest is paid annually at a guaranteed rate for a set term of five years and is tax free.
From a date in September – yet to be announced at the time of writing – this bond is to be withdrawn and replaced by a Junior Isa.
I will conclude this series next week by examining the remaining opportunities for parents and grandparents using collective investments and life assurance products.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn