As the festive season gets closer, have you thought about gifting your children or grandchildren something different this Christmas? Giving them a good start in life by making investments in their future can make an invaluable difference in today’s more complex world.
Many grandparents want to financially help the younger members of their families – whether to help fund an education, a wedding or a deposit for a first homeXmas is a time for sharing and giving, so what better gift to make to your children or grandchildren than a gift that has the potential to grow into a really useful sum of money.
There are a number of various ways you can 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 futureDon’t forget that tax rules tend to change over time so it is important to obtain professional financial advice before making financial decisions.
Table of Contents
Ownership Of The Investments
Investing money – either as a single lump sum or on an ongoing basis – is an ideal way to give a child a head start in lifeThere are several options available when it comes to ownership of investments for a childChildren will receive many of the same tax-efficient allowances as adults, so it’s a fantastic idea to consider specialist child savings accounts.
Some people much prefer to keep investments for children in their own name; that way, if a future need arises in which you require access to the funds, it is still available to you as it hasn’t yet been transferred to the child.
If you retain personal ownership of the investment, it’ll be your personal tax rates that apply as opposed to the child’sIf the investment stays in your estate upon death, more taxes could be payable, so be aware of this.
Bare Trusts
You can hold investments for your child in a bare trust or specified accountBare trusts allow you to hold an investment on a child’s behalf until they reach age 18 (in England and Wales) or 16 (in Scotland), when they’ll gain full control over the assets.
Bare trusts are very popular with grandparents who want to invest money for their grandchild, because the investments and/or cash are taxed on the child who is the beneficiaryThis is only the case if you aren’t the parent of the childIf you are and if it produces more than £100 of income, it’ll be treated as yours for tax purposes.
Grandparents can contribute as much as they want to, as there is no limit to how much can be invested each year into this type of accountThis can be a great way of reducing a potential Inheritance Tax bill if a grandparent would like to make gifts to a child.
Discretionary Trusts
A discretionary trust can be a flexible way of providing for multiple children, grandchildren or other family membersFor example, you may want to set up a trust to help pay for your grandchildren’s educationThe trust deed could give the trustees the discretion to decide what type of payments to make, depending on which children go to university, what financial resources their families have and so on.
A discretionary trust can have several potential beneficiariesThe trustees can choose how the income of the investment is distributedThis type of trust is particularly useful to give gifts to a number of people, such as grandchildrenHowever, it’s worth remembering 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).
Junior ISAs
If you want to make sure the money you give to your children remains tax-efficient, a Junior Individual Savings Account (JISA) is available for children born after 2 January 2011 or before 1st September 2002 who do not already hold a Child Trust Fund.
The proceeds are totally free from income tax and capital gains tax and are not subject to the parental tax rulesThey have an annual savings limit of £9,000 in the current tax year.
A child can have both a Junior Stocks & Shares ISA and also
a Junior Cash ISAFrom the age of 16, children can manage their JISA themselves, but cannot withdraw from it until the age of 18.
Child Junior SIPPs
It’s never too early to start saving for retirement – even as childrenWhile it may seem a little early to be contemplating retirement as the parent of a child, it is certainly worthwhileThe earlier someone starts saving, the more they will gain from the effects of compoundingThere are many wonderful benefits to setting up a pension for a childFor every £80 you contribute, the Government will add another £20, which is effectively free money.
A Junior Self-Invested Personal Pension Plan (SIPP) is a type of personal pension for a child and works just like an adult oneParents and grandparents can put up to £2,880 into a SIPP for a child each yearWhat’s great about this gift is that the Government will top it up with 20% tax reliefSo you area able to receive up to £720 extra, boosting the value of your present to £3,600This can help aid 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 term, you need to consider that they won’t be able to access their money until they are much older.