Tony Wickden continues his series on financial planning for children with a look at how collectives held in trust are worth considering for parents concerned about a child accessing funds when they come of age
One of the perceived impediments associated with the Junior Isa is that the “Junior” drops off at age 18 and the child becomes fully entitled to the invested funds.
For those who see this as a real problem, appropriate collectives held in trust might be worth considering.
That said, parents contemplating this strategy for minors will need to be careful about the anti-avoidance rules assessing the income generated on them if it exceeds £100 gross per parental donor per child in a tax year.
The most straightforward way to invest in collectives for children is through a designated account. Here, the unit trust/Oeic certificate will be issued in the name of the adult nominee, followed (usually) by the child’s name or initials to indicate the beneficial ownership. The nominee will have power to sell units/shares and to reinvest any investment income.
The disadvantage of a designated account is that the money may be locked in to the original investment until the child is 18 (although practice will vary). At age 18, the ownership of the investment can be transferred to the beneficiary. So that will not help those looking to avoid such a consequence.
An appropriate trust can help the donor secure greater flexibility and control. Arguably, a bare trust does not help, as the child can compel the transfer of the trust funds to him/her at age 18.
On tax grounds, whoever the settlor is, the capital gains made by the trustees will be assessed on the child. However, the income will be assessed on the parent if the child is an unmarried minor not in a civil partnership and income from all gifts from that parent to that child exceeds £100 gross in a tax year. If the parent is not the settlor, the child’s personal allowance can be used as the income will be assessed on them.
If a discretionary trust is used, income arising and not distributed will be assessed on the trustees, whoever the settlor is. Any realised capital gains will be assessed on the trustees and, in most cases, only half of the full annual CGT exempt amount will be available.
How about life assurance plans? Can they ever be appropriate as investments for children? Generally speaking, life offices that enter into contracts with minors take the commercial risk that such a contract may be repudiated by the minor on reaching the age of 18.
Regardless of this, some companies are happy to take this risk and a few life assurance companies and friendly societies are in a special position whereby an Act of Parliament enables them to issue policies on the life of a child and obtain a discharge from a child in the same way as from adult policyholders.
Typically, though, it will be necessary to use a trust where it is desired to invest in life assurance policies for the benefit of a child.
Held in trust
A qualifying regular premium plan could be effected for up to £3,600 per annum. This could be held in trust for the child (with some flexibility or discretion if required) and the benefits would, broadly speaking, be tax-free after 10 years.
A single premium investment bond could be used for those with a capital sum to invest. Typically, this would be held in trust for the child. Any chargeable event gains made while the policy is in trust will be assessed to tax on the settlor while the settlor is alive, except where the trust is a bare trust and the settlor was other than the minor beneficiary’s parent, in which case the chargeable event gain would be assessed on the beneficiary.
Offshore policies held in this way can offer tax-free accumulation and the potential for tax-free/tax-reduced returns; for example, under a bare trust, where the beneficiary is taxed and has an unused personal allowance and/or zero rate savings band. For parental settlements this will only work after the child attains age 18.
If the trust is a discretionary trust, the required end result could be achieved by making an absolute appointment to the beneficiary at age 18 or later, then assigning the bond to the beneficiary so they can encash, with any chargeable event gains being assessed to tax on them.
And let’s not forget that up to £25 per month (or £270 per year) can be paid to a friendly society plan on behalf of a child. A plan may be taken out by an adult in their own name, in which case it may be made subject to a trust for a child, or it can be taken out in the child’s name, so the child is the legal owner of the plan, although the parent/guardian will sign documents on the child’s behalf until they reach age 16.
In closing, remember it has not been possible to open a new child trust fund account since 1 January 2011. However, CTF accounts set up before that date can continue and top-ups can be made (although, of course, no further Government contributions are paid). From 6 April 2015, it has been possible for those with a CTF account to transfer into a Junior Isa, should they wish to do so.
The choice of an appropriate trust will depend on the circumstances and objectives. All advisers should know about trusts and their tax treatment before advising on this.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn