Child care
As the younger generation face rising education fees and a steep property ladder, parents and grandparents are seeking investment advice to help, says Lanying Burley
Clients often ask about investing for and gifting to their children and grandchildren. Everyone has different objectives and risk tolerances, but a well-managed portfolio can be structured to meet specific needs.
The portfolio could include a mix of longer-term growth assets and shorter-term holdings for liquidity. This can help fund education, for example, with the potential to provide a lump sum later on, perhaps towards a deposit for a first property.
Despite stock-market fluctuations, equity investments will typically be a key component. Importantly, equities can provide some protection from inflation, and while recent inflation figures have improved, inflation reached 5 per cent in recent years (in the past, it has been significantly higher).
Investments in equities can form part of a portfolio or be directly in, say, an investment trust bringing access to a spread of UK and overseas investments. Payments into child portfolios are usually made on a monthly basis, which can help to smooth stock market highs and lows.
Gifts to a child are potentially exempt from inheritance tax (IHT), provided the donor survives seven years. Otherwise, the annual £3,000 IHT exemptions for gifts and nil rate band (currently £325,000) would apply. If required, insurance can protect the gift if the donor died during the seven-year period. Depending on what is given, there may be capital gains tax implications on the disposal to consider.
Capital gifts from a grandparent, aunt or uncle, are more efficient than parental gifts. This is because where the income from gifts originating from a parent exceeds £100, the whole of the income is taxed back on that. In contrast, gifts from grandparents, for example, can be invested in the child's name or within a bare trust so that any income is taxed on the child and gains are subject to the child's own individual capital gains tax allowance (£10,900 in the current tax year).
Similarly, a child has a personal income tax allowance (currently £9,440), which means that tax will only be paid if substantial capital gifts are involved.?
ISAs
Grandparents and parents could also fund junior ISAs (£3,720 for this tax year). At 18, the child can access the junior ISA or it can be converted into an adult ISA. Cash ISAs are also available for anyone over 16; this year's allowance is £5,760.
Trusts and bonds
A child is entitled to the capital within a bare trust at age 18. However, investment bonds can be placed in a bare trust with a range of maturity dates to make funds available at a later age. This type of investment bond has no value until maturity and cannot be encashed early. Hence, a portfolio can be designed to support the younger generation's needs while building peace of mind for donors.
Offshore investment bonds can be held in a parent's name and used towards, say, school fees by using the annual tax-free withdrawal allowance of 5 per cent of the initial investment.
Once the child is 18, bonds can be assigned to them and, providing they are non-taxpayers then, it's usually possible to surrender the bonds without tax liability.?
National savings
Children's bonds are available from National Savings and Investment. There is no tax on the interest on this cash investment and the current 35th issue guarantees a compound rate of return over five years. The bonds can be cashed early with a penalty equivalent of 90 days' interest but they should be viewed as a five-year investment.
The maximum investment is £3,000 per issue and a parent, guardian and (great) grandparents can invest for anyone under 16. Bonds cannot be held beyond the child's 21st birthday.
|
First steps: investing for children
|
Lanying Burley is a partner at Smith & Williamson; Mike Fosberry, director of financial services, contributed to this article
Smith & Williamson writes a regular in-practice article on asset management for Private Client Adviser