Investing for the financial future of children and grandchildren are key areas of concern for parents and grandparents. This can be for various reasons including funding education or helping them to buy a house in the future.
There are special rules to consider when investments are made for the benefit of, or on behalf of, minor children.
Tax fundamentals
For tax purposes, a child is treated in the same way as an adult. This means there are opportunities to maximise the use of a child’s tax allowances and minimise tax.
The only exception to this is where a parent invests money for their child and the income generated from this exceeds £100 pa. These cases need a greater level of care.
How can I invest?
There are many options when doing this:
Bank or building society accounts
A child aged 7 or over may usually open a savings account and a child aged 11 or over may usually open a current account. Where large sums are involved, opening an account will involve more complexity.
Giving a child control of their money will help them to develop a good savings habit from a young age.
Junior ISA (JISA)
The Government made these available from November 2011. They are for anyone under 18 years of age, who is a UK resident and does not hold a Child Trust Fund (see below). Each child can have up to £9,000 paid in a JISA in any one tax year. More than one individual can pay into a JISA but the total paid in must not exceed £9,000. Various cash-based JISAs are available but you can also invest in various investments including stocks & shares. JISAs are free from most taxes and at age 18 convert to an ordinary (adult) ISA.
With a Junior ISA, the child can take control of their account at 16, though they cannot take the money out until they are 18. Between these years, they can hold both a Junior ISA and adult ISA, which will boost their tax-free savings for two years. If you are confident the child will manage their money well, a Junior ISA could be a good option. But if you are worried about what might happen when they have access tot he money, there may be better options.
Pensions
Anybody can invest up to £3,600 gross annually into a pension plan for a child. This could qualify from tax relief meaning a £3,600 contribution costs £2,880. The obvious disadvantage is that the funds will generally not be available until the beneficiary is aged 57+.
Unit Trusts/OEICs (“Funds”)
In most cases, these investments would be made by those over age 18 on behalf of the child, using a designated account. Here the investment will be issued in the name of the adult. This will be followed (usually) by the child’s name or initials to indicate the beneficial ownership. The nominee will have the power to sell units/shares and to reinvest any investment income. At 18, the ownership of the investment can be transferred to the beneficiary.
Investment Bonds
Typically, these will be necessary where someone has put money into a trust for a child (Covered later). These can be invested into cash or various investments including stocks & shares. Any gains are classed as income which could be assessable on the child or the person who gifted the money. Offshore policies held in this way can offer tax-free accumulation and the potential for tax-free/tax reduced returns, e.g. where the beneficiary is taxed and has an unused personal allowance and 0% tax bands.
The Child Trust Fund
No new CTFs can be established from 1 January 2011, but CTFs 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 to transfer into a Junior ISA (JISA), should they wish to do so.
Using trusts when investing for children
Many investment strategies for children may involve a trust. Sometimes, these will be where the money is held in trust until the child turns 18 where they will have access to it. We call these “bare” trusts. In other cases, the donor may want to have more control over the level of access the child will have over the money. We call these “discretionary” trusts.
The choice of an appropriate trust will depend on the circumstances and objectives surrounding the investments.
As you can see there are many options when investing for a child. The right choice will depend on the overall situation and what you want to achieve. We are specialists in this field and can offer unbiased advice.
If you want to know more, please feel free to book in a free no-obligation chat here or get in touch.
You should also bear in mind that the value of investments can fall as well as rise so the child could get back less than you invest.
