David Prosser discusses how a financial gift of shares in an investment company could turn out to be the best present of all this festive season.
“All I want for Christmas is shares is an investment company”, is something no small child ever said. Still, while everyone else is buying them toys they’ll be bored with by New Year’s Day, a financial gift could turn out to be the best present of all this festive season. If they don’t appreciate it now, they certainly will in the future.
The AIC’s numbers underline the point. If a parent, grandparent or godparent had invested £1,000 in the average investment company for a child 18 years ago, it would now be worth an £7,740 – a return of 674%. Alternatively, if the present was a monthly gift of £50, their savings pot would now be worth £36,878. That is the sort of money that could make all the difference as children head into further education – or even as they think about getting on the property ladder.
In which case, in addition to which investment company to invest in on behalf of a child, you will want to think carefully about how you make the gift. For example, do you want to maintain some control over how the money is spent? And what is the most tax-efficient option?
A Junior Isa in the stocking?
The easiest option could be a junior individual savings account. JISAs work in broadly the same way as conventional ISAs – they can be used to shelter a broad range of assets from income and capital tax, including investment company shares, and come with an annual contribution limit (£9,000 in the 2021-22 tax year). Once the money is in the JISA, it belongs to the child – no-one else, including mum and dad, can make withdrawals, and nor can the child, until they reach age 18, though they can start to manage it themselves from 16 onwards.
Bear in mind that JISAs can only be opened by the parents or legal guardians of a child – so if you’re gifting investments to godchildren, for example, you’ll need to sort this out. The person who opens the account is subsequently in charge of managing the money, though other people can make contributions.
Wrapped up in a trust?
If this approach doesn’t appeal – perhaps because the JISA allowance is already in use – you can retain more control by investing on behalf of the child yourself, but holding the money within a trust. This will enable you to manage the money and dictate how it will be accessed, while also making it clear that the investments are for the future benefit of the child.
For most people, a simple and straightforward bare trust will be suitable – investment company managers and fund platforms may be able to provide all the documentation you’ll need to set one up. Still, there are some tax considerations to bear in mind: income and capital gains on investments within the trust will count as the child’s, and may be tax-free if they’re not using their personal allowances in full; but gifts you make to a bare trust may count as part of your estate for inheritance tax purposes if you die less than seven years after making them.
It is also possible to set up more complicated trusts, but this will require specialist legal advice – if you want to set an age other than 18 for access, for example, or lay down conditions about how the cash is used.
Alternatively, you could avoid trusts altogether and simply invest on behalf of the child in your own name – you’ll then have complete control over the money, including the flexibility to hand it over when you like and in what circumstances. The downside to this approach, however, is that you’ll be personally liable for any income or capital gains tax liability.
A pension under the tree?
Finally, there is one other possibility – it is possible to use the pension system to make gifts to children. Pension savings for children benefit from initial tax relief of 20 per cent on contributions up to £2,880 each year before tax, or £3,600 including the relief, and you will be safe in the knowledge that neither the child nor anybody else will be able to access the money for many years.
In fact, the child will not be able to access any of their pension savings until they reach at least age 57 – so while getting them started on retirement savings may be valuable, if your intention is really about helping with education or, say, a deposit on a first home, this is the wrong option. Still, at least they’ll have something to remember you by for many years to come.