Many parents and grandparents want to help younger members of their family financially, whether it’s helping to fund an education, wedding or deposit for a first home. Making investments into their futures early on can make all the difference, and they’ll definitely thank you for it later. This festive season, perhaps consider giving a gift that has the potential to grow into an invaluable sum of money.
There are several different ways to get started with investing for children that could also help you benefit from tax incentives to reduce the amount of tax paid, both now and in the future. It is important to remember that tax rules can change over time though, so you should always obtain professional financial advice before making financial decisions, and we can help you with that!
An ideal way to give a child a head-start in life in to invest some money for their future, either as a one-off lump sum or on a regular basis. There are several options available when it comes to ownership of investments for a child. Children receive many of the same tax-efficient allowances as adults, so it’s a good idea to consider specialist child savings accounts.
It can sometimes be preferable to keep investments for children in your name just in case a future need arises in which you require access to the funds. This way, the funds will still be available to you as they will not yet have been transferred to the child.
If you do choose to retain personal ownership of the investment, it will be your tax rates that apply as opposed to the child’s. If the investment remains in your estate upon death, more taxes could be payable, so be aware of this.
It is also possible to hold investments for your child in a bare trust or designated account. Bare trusts allow you to hold an investment on behalf of a child until they are aged 18 years (in England and Wales) or 16 (in Scotland), when they’ll gain full access to the assets.
Bare trusts are a good option for grandparents who would like to invest for their grandchild because the investments and/or cash are taxed on the child who is the beneficiary. This is only the case if you are not the child’s parent. If you are the parent, and if the investment produces more than £100 of income, it will be treated as yours for tax purposes.
There is no limit for how much can be invested annually into this type of account, so grandparents can contribute as much as they like. This can be a great way of reducing a potential Inheritance Bill if a grandparent would like to make gifts to a child.
If you want to contribute for several children, grandchildren or other family members, a discretionary trust can be a flexible option. You may, for example, set up a trust to help pay for your grandchildren’s educations. The trust deed could give the trustees discretion to decide what payments to make, depending on which children go to university, what financial resources their families have and so on.
A discretionary trust can have a number of potential beneficiaries. The trustees can decide how the income of the investment is distributed. This type of trust is beneficial to give gifts to several people. However, it’s worth keeping in mind that the tax rules can become complex when using a discretionary trust and the investment and distribution decisions are taken by the trustees (of which you can be one).
If you want to ensure the money you give to your children remains tax-efficient, a Junior Individual Savings Account (JISA) is available for children born after 2nd January 2011 or before 1 September 2002 who do not already hold a Child Trust Fund.
The proceeds are free from income tax and capital gains tax and are not subject to the parental tax rules. They have an annual savings limit of £9,000 for the current tax year which runs from 6 April to 5 April the following year.
A child can have both a Junior Stocks & Shares ISA and a Junior Cash ISA. From the age of 16, children can have control over how their JISA is managed but cannot withdraw from it until the age of 18.
It’s never too early to start saving for retirement. Whilst it may seem premature to be thinking about your children’s or grandchildren’s retirement savings, it is undoubtedly worthwhile. The sooner someone starts saving, the more they will gain from the effects of compounding. There are great benefits to setting up a pension for a child. For every £80 you put in, the Government will top it up with another £20, which is effectively free money.
A Junior Self-Invested Personal Pension Plan (SIPP) is a personal pension for a child and works just like an adult one. Parents and grandparents can save up to £2,880 into a SIPP for a child each year. What’s so beneficial about this gift is that the government will top it up with 20% tax relief. This means you can receive up to £720 extra, boosting the value of your gift to £3,600. This can help a child to build a substantial pension pot if payments are made every year.
But while starting a pension for your child or grandchildren will benefit them in the long run, you need to consider that they won’t be able to access their money until they are much older.
Gifting money to your children or grandchildren can be a very wise choice, especially if thinking long-term. When it comes to investing for children, tax can make a big difference to returns over the longer term. We can help you decide on the right investments for the children in your life.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.