I was considering a savings plan for my children and wondered what options are available for me. I understand the government have also changed their mind in relation to gifts into trust for children.
If you look at their actions, it’s quite clear that the government are pretty keen to make it as difficult as possible to pass down wealth via trusts without having their take.
They have made a U-turn, and the revenue commission has announced that gifts to minors through absolute and bare trusts will not be regarded as chargeable lifetime transfers (CLTs) but as potentially exempt transfers (PETs) thus reversing its previous view. This simply means that these trusts will avoid potential entry, 10 year periodic and exit charges which as well as being substantial can be an administrative burden.
As far as savings are concerned, there are a number of options:
CHILD TRUST FUNDS, NATIONAL SAVINGS & INVESTMENTS, FRIENDLY SOCIETY PLANS, INVESTMENT FUNDS such as unit trusts etc and PENSIONS.
The fund options within a child trust fund make this option reasonably unappealing. When we see the child becomes automatically entitled to the cash at age 18, the benefit of the tax break disappears for me completely.
National savings have numerous tax breaks but they vary per product. For premium bonds and certificates there is no further tax to pay and no income is produced which is favourable as you will see in a moment. Children’s bonus bonds have no tax liability and the income is specifically excluded from the £100 rule I will explain in a moment. For long term investments you may well consider deposits such as these unexciting and they are unlikely to outperform equities over such a term.
Friendly society savings plans were sexy when politicians were, but somehow that has drooped and the old poor with profit options available, coupled with higher charges once again make this as appetising as used bath water.
Investment funds are probably my preferred option in terms of flexibility and taxation. There are thousands of fund options available – the widest range. They can be held as a designated account with simply the child’s initial on the application form or as mentioned above in a bare trust. You will see many funds packaged and marketed to parents directly such as ‘The Rupert bear fund’. We currently do not approve any such arrangements due to their excessive fees and underperformance.
Investment bonds are unavailable for children, although a parent could invest for them in an offshore arrangement and when the child turns 18 they could begin to assign segments of the investment bond to the children, ensuring that the gain is within their income tax allowance. The benefit is that the investment can grow free of tax and distributions can be made free of tax – an all round winner.
Pensions allow for a contribution to be made into a stakeholder or personal pension and should be considered for the tax breaks. They have simple administration, and the growth is very tax efficient. Most importantly the contribution enjoys tax relief so the current maximum of £2808 moving into the stakeholder will immediately grow to £3600. On the downsides, the child cannot access the capital to age 55 which will not be too exciting for the Ferrari seeking 18 yr old. Compound growth is vital and these early years’ contributions will go a long way toward ensuring financial security at retirement. For example a contribution of £3600 made at birth would grow to £31,700 (1) at age 65 whereas the same contribution made at age 25 would grow to just £13,700 (2).
Where a parent makes a gift to a child and the ‘income’ payable in any year from that investment is greater than £100, the full amount is taxable as if it was the parent’s. Both parents are naturally treated separately for this rule.
When using the aforementioned investment funds, any tax paid within the designated account can be reclaimed by completing form R85 or doing a tax return for the child. When choosing an investment fund its worth looking at what income will be paid within the fund to ensure you do not breach the rule above.
For a fact sheet on child funds or if you have a financial query, call 0800 0112825 or email info@wwfp.net
Source:
(1,2) Quotations from Standard Life
The value of shares and investments can go down as well as up
Follow us on Twitter
Become a fan on Facebook
Subscribe to the RSS Feed