Investing for Children
We share some tax efficient options...
An increasing proportion of first-time buyers are drawing on parental support to buy their home. Meanwhile, rising university costs are encouraging many parents to put money aside to help their children to fund their higher education. Add in private school fees or a wedding and any thoughts of a quiet, comfortable retirement might start to look a little remote.
Unless parents are earning a significant amount of money, managing these expenses out of day-to-day income is likely to be almost impossible.
We have therefore outlined some tax efficient ways to plan for this time:
Use your children’s Personal Allowance
Children have a personal allowance for income tax purposes, which is the same as that of an adult (£11,850 for 2018/2019).
You do need to be aware that, if you give money to your child that produces gross income of more than £100 a year, the whole of the income from that gift is taxed as if it were yours.
However, this limit only applies to parents and step-parents: grandparents and other adults who give money to children do not have to pay the tax if the interest exceeds £100 a year.
Junior ISAs (Individual Savings Accounts)
ISAs are available to children, and are known as Junior ISAs (JISAs). Just like a standard ISA, JISAs are long-term, tax-free savings accounts; however, JISAs are only available for children up to the age of 18, and the money cannot be withdrawn until the child’s 18th
Only a parent or guardian with parental responsibility can open a JISA. Anyone can contribute to the account, although the total amount that can be invested during a single tax year is capped at £4,260 for 2018/19 .
Although a child cannot have a JISA as well as a Child Trust Fund account (see overleaf), you can ask their CTF provider to transfer the trust fund into a JISA.
These are still a niche, long-term choice for investing for children, but can provide a solution in certain circumstances. Investments into a pension attract tax relief on the way in, but tax is payable on any income received. You can also put up to £3,600 gross every year in a pension on behalf of your child: this will cost a basic-rate taxpayer just £2,880, plus the government adds tax relief. Once your child reaches the age of 18, they will assume ownership of the pension, and they can begin to make contributions of their own.
Legislation over the past few years has eroded many of the tax-planning advantages of trusts. In general, they are used primarily to control access to the funds rather than for tax-planning purposes. A “bare” trust is the most common. Income and capital gains are regarded as belonging to the children, and this means they can use all their allowances each year.
Child Trust Funds (CTFS)
Although CTFs were stopped in 2010, millions of parents still have active CTF accounts for their children. Parents, family and friends can add a total of up to £4,260 to the account in the current tax year. There is no tax to pay on any income or any gains from the fund. However, as with savings accounts, it remains in the child’s name and they will ultimately control how it is spent.
Friendly Society Tax Exempt Plans
These savings plans are only available through Friendly Societies, which are mutual societies owned by their members for the benefit of their members. You can save up to £270 per year (or £300 per year in monthly payments of £25) into the plan for your child between 10 and 25 years, and the money will be invested into an investment fund. If you pay into the plan for at least 10 years, it will not incur any capital gains tax or income tax. On the plan’s maturity date, you must have paid into the plan for at least 10 years, and the child must be at least 16 years old.
Planning an investment strategy is crucial. You need to decide what your targets and timescales are, and whether you're aiming for a lump sum or an income.
When selecting your investment good questions to ask include 'How much risk can I take?', 'Will I protected against inflation', 'How is the world likely to change as my children grow up?'.
Contact us if you'd like to know more about investing for children.
Remember the value of your investments can fall as well as rise.