Saving for a child today is a wonderful gift for their
future. Whether you want to help them buy their first car, contribute to their
first home or even set them up for a comfortable retirement, there is little
more fulfilling than providing financial security for your children or
grandchildren.
It’s worrying to think about the expenses they will face as
adults. So, the earlier you can start investing money for your children, the
more chance it has to grow before they need it as an adult. But, to ensure that
the value of their money isn’t eroded by inflation, taxes and fees, you’ll need
to choose the right investment approach.
Here are some of the options you may wish to discuss with
us.
Junior ISAs
A Junior Individual Savings Account (JISA) is the children’s
equivalent of a regular Individual Savings Account (ISA) and works in much the same
way, protecting the capital within it, and any capital growth, from Income Tax
and Capital Gains Tax. You can choose between a Junior Cash ISA and a Junior
Stocks & Shares ISA, or a child can have one of each.
Only a parent or guardian can open a Junior ISA on a child’s
behalf, but anyone can pay into it, up to a limit of £9,000 in the current tax
year (that limit may change in future tax years). The UK tax year starts on 6
April each year and ends on 5 April the following year. Once a child turns 16,
they gain control of their ISA, but they cannot make withdrawals until they
turn 18.
Junior SIPPs
A Junior Self-Invested Personal Pension (Junior SIPP) is a
type of pension you can open on behalf of someone who is under 18. While we
often think of a pension as a product for adult workers, opening one for a
child has many benefits.
Investments in a Junior SIPP have more years to grow before
the pension holder retires, and so can benefit greatly from compounding
returns. If appropriate, due to the very long-term nature of the investment,
it’s possible to take a higher-risk approach than with shorter-term
investments, which has the potential to yield greater rewards.
As with an adult pension, all growth is protected from
Income Tax and Capital Gains Tax. So, it could take away some of the burden of
retirement planning as an adult. For a child with no earnings or earnings below
£3,600pa, contributions are currently capped at £2,880 a year, totalling £3,600
after tax relief is applied, in the current 2021/22 tax year.
Trusts
Trusts are a legal agreement where you – the ‘settlor’ –
place assets into a trust and nominate a trustee to manage those assets
(whether it’s money, buildings, land or investments) on behalf of your child or
children, known as the ‘beneficiaries’.
Bare Trusts
A bare trust is an investment vehicle that allows you to
invest capital on behalf of a child while retaining full control of the
investments until the child turns 18, or 16 in Scotland.
Along with the initial capital, any return generated by a
bare trust will belong to the child. It will therefore be taxed as such,
usually meaning that there is less tax to pay than if the investments were held
by the adult, since a child has their own personal allowances for income and
capital gains.
Under parental settlement rules for income tax, if the
income exceeds £100 each year then the whole amount will be taxed as the
parent’s. There is no upper limit on how much can be invested each year in a
bare trust.
Discretionary Trusts
The main difference between a bare trust and a discretionary
trust is that a bare trust is held on behalf of a specific, named individual or
individuals, while a discretionary trust is held on behalf of any number of
eligible individuals.
For example, a grandparent may open a discretionary trust
that any of their grandchildren or future grandchildren can benefit from. Who
benefits from the trust will ultimately be decided by the trustees.
The tax treatment of a discretionary trust can vary
depending on your specific financial situation, so you should seek professional
financial advice before opening one.
Want to Find Out More About How to Get Started?
When it comes to investing in your child’s or grandchild’s
future, putting aside just a small amount of money on a regular basis can really
add up. Each option comes with specific advantages and risks. If you’d like to
find out more about how to get started, please get in touch with us today – we
look forward to hearing from you.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF
TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS
FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN.
YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE
PERFORMANCE.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION
& TRUST ADVICE.