Parents and relatives are often keen to invest on behalf of children and there are a number of opportunities open to them. In this article we will explore some of the options available.
Children’s Savings Accounts
These accounts work in the same way as ordinary savings accounts and can be set up with Easy Access, Fixed Term/Notice or Regular Savings in mind.
For the account to be in the child’s name, they need to be 7 or older and there is usually no tax to pay on the interest, which is an advantage over a normal savings account for adults. Parents can contribute to the children’s accounts but need to be wary if interest exceeds more than £100 per year, in which case the parents could be liable for tax. Interestingly this rule applies to parents only and not to money provided by grandparents or other relatives.
JISAs (Junior ISAs)
Parents and grandparents may have a goal of funding university fees and JISAs are a good way to save in a tax efficient manner. JISAs cannot be accessed until the child turns 18 and the current limit is £9,000 p.a. Both parents and grandparents (and anyone else for that matter) may contribute to the JISA as long as the £9,000 p.a. limit is not breached. The JISA may then be invested for the future in a range of asset such as stocks and shares.
Any child who qualified for a Child Trust Fund (the precursor to the JISA) also enjoys this £9,000 p.a. subscription limit.
Grandparents can consider gifting to fund school-fees or university education. If the gift is £3,000 or under (per grandparent), there should be no Inheritance Tax consequences for the grandparent. Grandparents may also gift from their regular income if that income is more than they need to live on. Larger gifts may be given by grandparents, perhaps into trust (which is a legal arrangement) which is an Inheritance Tax efficient way for them to gift. This is a complex area and advise should be sought before undertaking this option.
For parents thinking about the longer term horizon, beyond school and university, funding a pension for a child is a great way to benefit from long term investment, as the child will benefit from the effect of compounding, which Albert Einstein said was the “…eighth wonder of the world…”
Put simply, this means that their money will grow faster than just normal ‘simple’ interest, creating a snowball effect over the long term.
Parents can set up a pension for their child and anyone can contribute to the limit of £2,880 p.a. HMRC will then apply tax relief, effectively grossing this figure up to £3,600 p.a.
Given that the earliest that anyone may access their pensions is presently 55 (with plans afoot to increase this minimum pension age) saving into a pension for a child could provide them with a welcome boost to their adult life, knowing that they are already underway with long term savings.
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The information contained within this article is for information only purposes and does not constitute financial advice. The purpose of this article is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice. Information within this article is based on our current understanding of taxation and can be subject to change in future.