Personal Investments

Children’s Investment Planning

There is a multitude of options when considering setting aside monies for the medium to long term benefit of your child.

The suitability or appropriateness of any such option is determined by the identified attitude to investment risk, the tax position of the parent, the term of the intended investment and the expected level and regularity of contributions.

For those seeking a low level of risk, a bank or building society cash deposit account may be an initial consideration. This will provide capital security, although due to low interest rates, the real rate of return shall be minimal. A claim may be made for the interest to be paid gross as, like an adult, a child enjoys a personal allowance (£6,475 in 2010/2011). However, if interest produced directly from parental gifts exceeds £100 gross per annum, this is no longer treated as that of the child and is instead taxed on the parent.

National Savings is an alternative option offering a variety of capital secure, low risk investments which are again another capital secure investment. Tax-free options are Premium Bonds, Children’s Bonus Bonds and Index Linked Savings Certificates. Savings accounts are also available, although the interest rate can generally be improved upon in the high street.

To encourage saving, the Government launched Child Trust Funds (CTFs). These give every eligible child, born after 1st September 2002, a personal kickstart to their savings worth at least £250 or £500 if your family receives full Child Tax Credit. Gifts from family or friends may be added to the account, provided these do not exceed an overall limit of £1,200 per annum.

The Government will also put a further £250 money into the account when the child attains age 7. This will be done automatically and will go to all children living in the UK with a CTF account for whom a child benefit award is in place. Again, children from lower income families will receive £500. You will need to make sure the Child Benefit Office (CBO) have your up-to-date address at the time.

Returns from this investment are free of Income Tax and Capital Gains Tax (CGT). They offer a tax efficient haven with access prohibited by anyone other than the child themselves once they attain the age of 18.

Friendly Society investments are ideal for additional savings over and above a CTF or for those who are not eligible for one. They are also suitable for intended lower levels of contribution, permitting a maximum investment of £25 per month or £270 per annum.

You could also entertain contributing to a designated unit trust. Until March 1999, parents who created a ‘bare’ trust for a minor child (one set up for the child’s absolute benefit), were only taxed on distributed income.  Any undistributed income held within the trust was treated as that of the child not the parent.  Since then, any new bare trust arrangements ceased to be effective and retained income is taxed on the parent if this equates to more than £100 per annum.

Therefore, a ‘growth’ unit trust with little or nil yield should be considered to avoid any unnecessary taxation on yourself. A unit trust is a pooled investment, and as such will benefit from economies of scale and diversification.  If a unit trust is designated, a trust will be established, and any gains will be assessed on the child individually.  Of course, these may be offset against any of their unutilised personal Income Tax allowance and CGT exemption in due course.

A key consideration of alternative approaches is the fact that once an investment reaches maturity the child for whom it is intended will immediately benefit once  they attain the age of 18. At that time the parent holds no control over whether they should receive the monies or not. It is our experience that parents do wish to retain some control over this to ensure they benefit from any proposed investment only if they deem appropriate, particularly where larger investments are being proposed.

If you do wish to retain control over these investments, an investor could consider contributing into a personally owned Individual Savings Account (ISA). Of course due consideration should be given to the effects on an individuals own investment planning if considering this option.

A final option for any generous parent or grandparent may be to contribute into a Personal Pension Plan. Such contributions would benefit from Income Tax relief, albeit at basic rate only. However, one downside of such investments is that of accessibility. Once invested into the plan, the child may not access the funds until they reach minimum retirement age, which with effect from 6th April 2010 is 55. These would clearly be inappropriate if the intention is for the child to benefit significantly earlier.