Investing some money – either as a one-off lump sum or on a regular basis – is an ideal way to give any child a head start in life. And, because of their low charges and long-term performance record, investment companies are a good way of investing on behalf of a child. It’s a particularly useful way for parents, grandparents or godparents to make a lasting gift – and one that the child will appreciate even more when he or she is old enough to know the importance of money.
A summary of some of the considerations and features of investment for children are discussed below. We have produced a factsheet (PDF 90KB) on investing for children which contains more details on how to invest on a child’s behalf as well as details on the tax implications.
Children under the age of 18 are not allowed to hold company shares in their own name. One way around this is for you to invest on their behalf. You can do this through any investment company saving and investment scheme and some management companies have plans specifically for children. You can choose to hold company shares either in your own name and “designate” on the application form that you are holding them on behalf of a child (by adding the child’s name or initials to the form) or, you can hold company shares in a “bare trust” for the benefit of the child.
Junior ISAs
The ‘Junior ISA’ (JISA) was launched on 1 November 2011 and is a new product designed to enable and encourage long term saving for children. Children born after 1 January 2011 are eligible for a Junior ISA. Friends and family are able to contribute up to £3,600 each tax year into a child’s JISA. Children can hold one cash and one stocks and shares JISA at the same time up to an overall limit of £3,600 per tax year.
As with an ‘Adult’ ISA, the account will be tax free and funds placed in the account will be owned by the child, although they will be locked in until the child reaches age 18. When a child turns 18, the Junior ISA can be rolled over into an Individual Savings Account (ISA) so that the fund will not be subject to income or capital gains tax.
Child Trust Fund (CTF)
The Government-sponsored Child Trust Fund (CTF) started in April 2005. Each child born on or after 1st September 2002 was eligible for a voucher from the Government for at least £250 to start the account (£500 for children from low income families) which was topped up again with the same sum as the child reached age 7. However, Government contributions for CTFs stopped on 1 January 2011.
Children born on or after 1 January 2011 will not be eligible for a Child Trust Fund but will be eligible for a Junior ISA. CTF accounts already set up for eligible children will continue to benefit from tax-free investment growth; as before, no withdrawals will be possible until the child reaches the age of eighteen. Family and friends of the child are still able to contribute additional amounts to the CTF, up to a limit of £3,600. This limit was raised on 1 November 2011 to keep it in line with the new Junior ISA. It will still be possible to change the type of CTF account and/or move it to another provider.
The first CTF account will mature in 2020. When a child turns 18, the CTF can be rolled over into an Individual Savings Account (ISA) so that the fund will not be subject to income or capital gains tax.
School or university expenses
Investing for school or university fees, where you are trying to achieve a certain level of return within a specified time frame is very different to investing without a specific need or goal. Knowing roughly how much money you will need, and by when, should help you choose what’s most appropriate for you.
Child’s Pension
Since 2001 it has been possible to start a pension for a child. In most cases, contributions of up to £3,600 gross, £2,808 net, can be made to a child’s pension each year. It is possible to pay in more than this but no further tax relief will be given on the contributions. Investment companies, given their low charges and long-term performance, are particularly suitable for this purpose.
What are the tax implications?
When setting up any investment scheme you need to take a close look at the tax situation, not only how it affects the child, but also how it affects you or any other donor. One of the most important questions to ask yourself is whether you will have to pay tax on the child’s investment income. This really depends on who is gifting the investment to the child and what their relationship is. If you decide to make a gift to a child you should be aware of the Inheritance Tax (IHT) implications.
Investment companies are a good way to save for children as they are an effective and cost-efficient investment vehicle which provides exposure to a diversified portfolio. The flexibility and accessibility of investment companies due to their low minimum investment levels and ability to spread risk makes them an ideal way to give any child a head start in life. Investors who are unsure whether this investment is suitable to them should obtain independent advice from their professional adviser.
Pension schemes
