Investing for your Children
The media is still full of headlines suggesting that first-time buyers will continue to need help to get onto the property ladder.
If you wish to help give your children a kick-start in life and maybe even build a fund that they can purchase their first house with, then there are many ways that you can do this. In some cases you can actually help the family unit as a whole to save tax by moving taxable income from your name to your children.
In no particular order, here are a few suggestions of how you might wish to help your children invest:
1. Bank accounts
All UK resident individuals (adult or minor) have a personal allowance of £6,475 in the 2010/11 tax year (£7,475 per annum from 6 th April 2011) where they can earn income without any tax consequence whatsoever. One form of income they could receive is interest on a bank account and should the interest be below this figure, it can be paid gross to the children in question. However, note that if a parent invests money on the child's behalf, any interest earned over and above £100 per annum would be taxable on the parent, but this does not apply to any savings made on a child's behalf by grandparents or other family member.
Parents looking to invest larger sums of money may therefore wish to look at tax-free investments of which ISAs are often the obvious choice. However, ISA's are not available to children under the age of 16 and any investments made on a child's behalf are held in the adult's name in turn using up the adult's annual allowance, until the child turns 16.
However, children over the age of 16 are allowed to invest into a Cash ISA, and over the age of 18, they can invest in a Stocks & Shares ISA.
3. National Savings and Investments products
If you are investing on behalf of younger children, interest or winnings on Children's Bonus Bonds and Premium Bonds respectively are both tax free. The former provides an interest rate on the investment payable to the child and if the investment is retained for five years, a tax free bonus is also paid. Premium Bonds on the other hand do not provide an interest rate but instead winnings of between £25 and £1 million tax free may be awarded on the bonds held.
As with any other individual, children can own Premium Bonds of up to £30,000 each which if they wish can also be sold in the future for cash.
4. Stocks, shares and collective investments
Any gains made on stock, shares or collective investments are assessable to capital gains tax However, as with any other individual, each child also receives an annual allowance for capital gains tax of currently £10,100, and so relatively small gains made on these investments may produce further tax-free returns for your children. Some of you may even consider placing some of your current investments into your children's names in order to take advantage of this, but be aware that the money cannot be transferred back when the assets have been sold!
Whilst this is obviously very long term planning as your child will not be able to access their pension fund until the age of 55, current legislation does allow for anyone to put up to £3,600 as a gross contribution into anyone else's pension pot including any children that they may have. In terms of cash, the gross contribution of £3,600 actually equates to £2,880 as the government will top up 20% in the form of tax relief, even if the recipient of the pension fund is not a taxpayer, and so this really is money for nothing in this case!
Once inside a pension, the fund will grow tax-free and once your child is 55, 25% of the fund could be drawn tax-free as a lump sum.
With the exception of pensions, there are various ways in which you can provide for your children and possibly give them a fund that they can access in later life to purchase their first property or any other assets they may wish to have. Of course, you should consider that any investments made in a child's name will be accessible by them when they reach the age of legal capacity, which in the UK is 16 and therefore you may wish to use some form of trust to prevent any squandering of funds that you have worked hard to put away on their behalf!!
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