Frequently Asked Questions

Investing for Children

What are the benefits of investing in a saving for children product ?

There are a hundred good reasons to start saving for a child, whether it's short term saving for a present; for longer term saving for their gap year before university; for their wedding day; or simply to help them get a head start in life.

I can't afford to invest a lot each month. is it still worthwhile ?

It is still worthwhile saving smaller amounts on a regular basis. If you save £30 per month over 10 years at a growth rate of 5%, you would get back over £4,658.40. Over 12 years you would get aback over £12,300.

What are the tax implications of investing for children ?

As every individual's tax circumstances is different, if you are in any doubt, you should seek independent advice. However, the following gives a brief summary of the tax reliefs available. If the parent holds an account or makes an investment on behalf of their child which generates an income of more than £100 a year, it will be taken as part of the parents' income, not the child's, and they will have to pay income tax on the full amount earned. This applies until the child is 18, provided they remain unmarried. One possible solution to the income tax problem is to invest in growth funds which don't seek to generate an income. However, the fund may still be liable to Capital Gains Tax if it grows by more than a certain amount each tax year. Inheritance tax is a more complicated issue and may be payable by your children on your estate. However, one way of minimising their tax bill is to start giving them gifts now. You are allowed to make tax free gifts to whomever you want for as much as you want, provided it is an outright gift from which you receive no benefit. If you live for more than seven years after you make the gift, there will be no tax to pay on it by your children. Some gifts to your children are always free of tax, such as:

• Wedding gifts up to £5,000 for each of your children, £2,500 for each grandchild and £1,000 each to anyone else;
• Other gifts up to a total value of £3,000 a year, plus any unused part of the previous tax year's £3,000 exemption.

What are the tax implications for gifts from grandparents, relations or friends ?

If anyone other than the parents makes a gift or an investment on behalf of a child, then there is no income tax to pay as long as the income generated is within their annual allowance. Any income earned over and above this amount will be charged to the parents. In order to register a child's account to be paid interest tax-free, a parent or guardian must complete form R85 with the child's details and sign it on their behalf. Interest can then be paid gross until the child is 16, as long as the deposit came from someone other than the parents.

What are the tax implications when writing your assets in trust ?

People in Britain waste as much as £1.2 billion[3] each year through neglecting their inheritance tax planning. When you die, if you leave a substantial amount of your possessions to anyone other than your partner, they may have to pay inheritance tax on what you give them. This can be avoided by writing your assets in trust in your child's name and making them the legal owner. A trust is a separate legal entity which is set up on behalf of a named beneficiary – usually by a parent on behalf of their child. The assets are protected and managed by the trustees on behalf of the child until they are 18. Trusts are extremely cheap and simple to set up, which is why it's always wise to consider putting all your assets, including your life assurance, into trust. The 40% inheritance tax can be avoided, as the assets already belong to the beneficiary. Some companies offer specialist savings schemes for children which are automatically written in trust for this very purpose. One or both parents can become trustee to the trust, and retain legal control until the child reaches 18. The parent has no legal rights to the proceeds and the investment is no longer part of the parent's estate – which is why there would be no inheritance tax due upon the death of the parent. If you know you won't need to access your investment and are prepared to hand over your assets to your child, then there are significant advantages to be had by writing your investment in trust.

Source of Information: [3] IFA Promotion

How long can I afford to wait before cashing in my investment ?

Investing on behalf of your children gives you more flexibility than other savings motives, because it tends to be for the longer term. This gives you a wider choice between the savings and investment products available.

The type of savings account or investment will depend on the reasons why you are saving. Do you want your money to grow to provide your children with a lump sum when they come of age, or do you want it to produce an income to provide for regular expenses? The length of time you intend to save for helps in determining which product is most appropriate – there's no point investing in the stock market if it's for less than, five years, while leaving large sums indefinitely on deposit in a normal savings account means that your savings will be seriously affected by inflation.

How much risk should I take ?

The next thing to ask yourself is how much risk you are prepared to take with your child's savings. If it's money invested for the longer term, you can afford to take more risk and have the potential of greater growth. However, you may wish to sacrifice the possibility of greater growth for a low-risk and steady investment.

You have to be comfortable with your investment decision – regardless of how long you want to invest – which is why it's important to consider a wide variety of different types of products which take different degrees of risk. Contact your financial adviser for further information and advice.