Tony Granger looks at investments for children and their tax implications.
There are a number of reasons for making an investment for a child, and some investments are available only for children. Possible reasons include: investing for school and university fees; making a lump sum available as a deposit to get onto the housing ladder; providing a nest egg; paying for a wedding or an early start for retirement. Children may have savings to invest from different sources, including birthdays and pocket money.
Children’s tax status
Children have their own annual tax allowances and capital gains tax exemptions. For 2014/15, the first £10,000 of otherwise taxable income is tax free; there is also a capital gains tax exemption of £11,000. A parent may pay higher rate tax at 40-45%, and family money may go further if income is taxed in the hands of the child with a lower tax rate.
If the source of funds is from parents, the general rule is that they are taxed on any interest over £100 in any one year (£200 if gifts are made separately by both parents) – except for interest arising on the national savings children’s bonus bond, child trust fund investments and new individual savings accounts (NISAs). Under £100 a year, it is treated as the child’s income. Once the child reaches age 18, the income is treated as his or her own. If the money came from anyone else – grandparents, relatives – then any income arising is treated as the child’s for tax purposes.
Children’s investments
The following are investments that can be made for the child or by the child.
Junior NISAs
Up to £4,000 can be invested each year from birth. No access is allowed to age 18. If the child is age 16-17, he can get two NISA allowances – the ‘Junior NISA’ plus the ‘adult NISA’ of £15,000. Investments can be in cash or stocks and shares. Income and growth are tax free.
Stakeholder pension
With no age limits, the gross pension that can be invested each year without earnings is £3,600 – you pay £2,880 and HMRC add another £720, for a guaranteed return on each contribution of 20%. The investment will have tax free compound interest growth to age 55, so it is very long term.
Children’s bonus bonds issue 35
This offers a guaranteed compound rate over five years including 5th anniversary bonus, and is tax-free, paying 2.5% AER. You can invest tax-free for your child’s future in their own name. All returns are completely tax-free for both child and parent. The minimum deposit is £25, and the maximum in the account is £3,000; interest is paid on maturity.
Bank and building society accounts
Children’s deposit accounts must be in the parent’s name if the child is under age seven, but designated with the child’s initials. If the child makes the deposit (or a third party other than a parent) the child will be taxed. Provider incentives currently include Halifax with a one year kids’ regular savings plan paying 6% annually – the minimum is £10, the maximum £100 per month. The maximum age is age 15 for this bank account. Nationwide (to age 17) and Barclays (to age 18) offer 3.5% AER.
Friendly society policy
No minimum age and returns are tax-free after ten years on this endowment policy with maximum monthly premiums of £25 (annual £270).
Maximum investment plans and endowment policies
Minimum age is twelve years and policies mature tax free after ten years.
Unit trusts and investment trusts
An equity investment purchased in units, with no minimum age, for longer term investments which can be made monthly. If under age 18, the investment is in the name of the parent for the child in a designated account.
Practical Tip:
Make monthly savings on a regular basis for your children. NISAs offer the best flexibility for easy access, but pensions are good long term savings plans, no matter what age.
Children’s investments enable generational family investment planning on a broader basis for tax savings, and making use of additional tax allowances. They certainly are worthwhile.
As always, seek expert financial advice based on your individual circumstances.
