Many Parents and Grandparents seek to build savings for the kids to fund education needs, house deposits (these are probably the expensive reasons)
Often the issue of control is acute and there are options whereby the child does not know the savings exist until you choose.
We often help to draft Trusts to help with Inheritance Tax issues, while also maintaining some element of control over the life of the savings pot
The policies below are the main types currently available;
Individual savings accounts (ISAs) are now available to children, and are known as Junior ISAs. These are long-term, tax-free savings accounts – however, Junior ISAs are only available for children up to the age of 18, and the money cannot be withdrawn until the child’s 18th birthday. Anyone can contribute to the account, although the total amount that can be invested during a single tax year is capped at £4,128 (2017/18)
Child Savings Bonds
These are offered by friendly societies and allow parents, grandparents, other relatives and friends to all save up to £25 a month on behalf of each child with the benefits then being earned free of further tax. The bond must have a minimum term of 10 years, up to a maximum of 25 years. The contributions must be maintained to earn the tax benefits. However, they do offer a valuable alternative, particularly if you are not the child’s actual parent.
These are a niche 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 contribute up to £3,600 gross every year in a pension on behalf of your child. That will cost a basic-rate taxpayer just £2,880 as the government adds tax relief, but the child will not be able to access the money until they are 55 (2017-18)
Life Company Regular Savings Plans
These tend to be used by relatively sophisticated investors, particularly expats and international executives. Investors can use them to build up a tax-free lump sum and then assign segments of it to their children. These segments are usually paid out tax-free as long as they fall within a child’s tax-free allowance but, in the meantime, the policyholder retains control of the investment policy. However, minimum investment levels may be higher than some other options.
Designated Investment Accounts
These are a good alternative to a Junior ISA, if you wish to retain control of the investment once the child reaches 18. These are simply held in the Parents name(s) and are Designated for the child, and until the parents (or grandparents) decide, the investment is held without the knowledge of the child.
Child Trust Funds (CTF)
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 £3,600 to the account each year. There is no tax to pay on any income or any gains from the fund. The account remains in the child’s name and they will ultimately have control over how it is spent.
Legislation over the past few years has eroded many of the tax-planning advantages of trusts. In general, these are now used to control access to the funds rather than for tax planning.
Income and capital gains are treated as those of the children, which means that they can use all their allowances each year. It also gets round the problem that children cannot hold shares in their own name.