Time Flies - Saving for Children
As a parent of a ten year old boy and a new baby daughter I am aware how fast time seems to pass as children grow up (indeed I was once a child myself and it seems a lifetime ago!)
As a parent of a ten year old boy and a new baby daughter I am aware how fast time seems to pass as children grow up (indeed I was once a child myself and it seems a lifetime ago!)
I’m often asked about saving for children and what can be done for them.
Nowadays there is the ‘Child Trust Fund’ – originally, a Labour idea, popular with some as indicating that any money set aside for children as they grow up will be good and with the added benefit of (now substantially reduced) state contributions. Those less enamoured of the concept simply called it a tax on the childless!
In any event, its key facts could be summarised as follows:
• A long-term savings and investment account where your child (and no-one else) can withdraw the money when they turn 18
• neither you nor your child will pay tax on income and gains in the account
• £250 voucher to start each child’s account
• children in families with lower incomes will automatically get an additional payment of £250 from the Government. For more information use this link
Qualifying for the additional payment
• a maximum of £1,200 each year can be saved in the account by parents, family or friends
• money cannot be taken out of the Child Trust Fund (CTF) once it has been put in – once your child is 18 they will be able to decide how to use the money
• children can start to make decisions about how the money is managed when they are 16
• the Government will make a further contribution when your child turns seven - all eligible children will receive a further payment of £250 into their CTF account at age 7, with children in lower income families receiving an additional £250. These payments will be paid around the child's 7th birthday direct into their account
• from April 2010, children entitled to Disability Living Allowance (DLA) will receive annual payments of either £100 or £200 dependent on the care component of their DLA award
• not just one type of CTF account – you choose the type of account you want for your child
• at any time you can move the account to a different provider or change the type of account
• it will not affect any benefits or Tax Credits you receive.
But what if your child was born before 1 September 2002?
Because children born before this date do not qualify for a CTF.
(There are other exceptions to which children can have them – full details on that and all other aspects at the Govt website http://www.childtrustfund.gov.uk/)
So back to time passing…
It makes sense to have time on your side and start saving sooner rather than later.
(More on lump sum investing further on)
A longer term investment is ideal if you want it to mature at the same time as your child
I’d generally suggest there are two main ways to invest.
It makes sense to have time on your side and start saving sooner rather than later.
(More on lump sum investing further on)
A longer term investment is ideal if you want it to mature at the same time as your child
I’d generally suggest there are two main ways to invest.
Similar to deposit based is National Savings and Investments. They have a number of accounts suitable for children. The following is taken from http://www.nsandi.com/savingneeds/investforachildsfuture
Invest for a child
Whether you want to invest for a child’s future or encourage them to save for themselves, we have a range of investments to choose from.
Children’s Bonus Bonds
An easy way to build up a tax-free lump sum for your child’s future. Guaranteed rate of interest and bonus every five years. Invest from £25 up to £3,000 in each Issue.
Premium Bonds
We pay out a £1 million jackpot and over a million other tax-free* prizes every month. Invest from £100 up to £30,000. Can be bought for a child under 16 by the child's parent, guardian, grandparent or great grandparent. A parent or guardian must be nominated to look after the Bonds until the child is 16.
Investment Account
A straightforward passbook savings account, with easy access to your money. The more you save the higher the rate of interest. Passbook to help your child keep track of their money. Invest from £20 up to £1 million. You can also set up a standing order for as little as £10 a month.
IG: Whilst the rates are often less than competitive the main advantage of National Savings is that they say they are 100% secure because National Savings and Investments is backed by HM Treasury, so any money you invest with is 100% secure.
Whether you want to invest for a child’s future or encourage them to save for themselves, we have a range of investments to choose from.
Children’s Bonus Bonds
An easy way to build up a tax-free lump sum for your child’s future. Guaranteed rate of interest and bonus every five years. Invest from £25 up to £3,000 in each Issue.
Premium Bonds
We pay out a £1 million jackpot and over a million other tax-free* prizes every month. Invest from £100 up to £30,000. Can be bought for a child under 16 by the child's parent, guardian, grandparent or great grandparent. A parent or guardian must be nominated to look after the Bonds until the child is 16.
Investment Account
A straightforward passbook savings account, with easy access to your money. The more you save the higher the rate of interest. Passbook to help your child keep track of their money. Invest from £20 up to £1 million. You can also set up a standing order for as little as £10 a month.
IG: Whilst the rates are often less than competitive the main advantage of National Savings is that they say they are 100% secure because National Savings and Investments is backed by HM Treasury, so any money you invest with is 100% secure.
NS&I is one of the largest savings organisations in the UK, with over 26 million customers and over £99 billion invested.
Our principles
As an Executive Agency of the Chancellor of the Exchequer, we aim to:
- provide a totally secure place for people to save, backed by the Treasury
- provide the Exchequer with a source of financing (i.e. public borrowing)
What about non Deposit (cash) based investments?
With interest rates today at a historical low, many people find the rates derisory.
Our principles
As an Executive Agency of the Chancellor of the Exchequer, we aim to:
- provide a totally secure place for people to save, backed by the Treasury
- provide the Exchequer with a source of financing (i.e. public borrowing)
What about non Deposit (cash) based investments?
With interest rates today at a historical low, many people find the rates derisory.
So the second type, EQUITIES (stocks and shares) could be an alternative.
But be warned, investing in equities is VERY DIFERENT from cash or deposit based investments.
Most people have seen the ‘standard risk warnings’ on equity based investments, namely:
“Please remember that past performance is not a guide to future performance. The value of an equity investment and the income from it can fall and rise, as a result of market and/or currency fluctuations, and you may not get back the amount originally invested”
Most people have seen the ‘standard risk warnings’ on equity based investments, namely:
“Please remember that past performance is not a guide to future performance. The value of an equity investment and the income from it can fall and rise, as a result of market and/or currency fluctuations, and you may not get back the amount originally invested”
So if you don’t like the sound of this, go for deposit based. But if you are open to considering the well-publicised ups and downs of equity investment in the belief that in the longer term the ups outweigh the downs, read on…
‘Equity’ is just the technical name for stocks, or shares – in simple terms you are buying a ‘share’ of a company that entitles you to a share of any growth in the value of the company – by virtue of the share increasing in value – or profit – by virtue of the share paying out a dividend.
The downside to this is that if you only buy one or indeed a small number of shares it means your entire investment is dependent on the fortunes of that one company. And no matter how ‘sure a bet’ a company looks today, tomorrow can always bring a different result – think BP in recent history.
‘Equity’ is just the technical name for stocks, or shares – in simple terms you are buying a ‘share’ of a company that entitles you to a share of any growth in the value of the company – by virtue of the share increasing in value – or profit – by virtue of the share paying out a dividend.
The downside to this is that if you only buy one or indeed a small number of shares it means your entire investment is dependent on the fortunes of that one company. And no matter how ‘sure a bet’ a company looks today, tomorrow can always bring a different result – think BP in recent history.
To avoid this there are ‘funds’ available that enable an individual to achieve much greater ‘diversification’ at a lower cost than buying and managing a large portfolio of shares themselves. These are also very suitable for investing for children as the initial amounts can be quite low, around £25-£50 per month. There is an economy of scale in that everyone spreads their costs.
These funds can be managed by fund managers or low cost ‘tracker’ funds that just aim to replicate what a market is doing, for example following the FTSE100
We advise many clients on ‘Green’ or ‘ethical’ (sometimes called ‘socially responsible’) funds so you can also aim to have your investments do good (or avoid bad) during their investment lifetime.
As above, the practical implications of the fund approach can also be considered a positive as unlike buying shares directly there is just one administrative point of contact and update.
Back to investing small (or large!) amounts regularly – there is a phenomenon called ‘pound cost averaging’. In simple terms this is about the ‘when’ of investing in the markets. As it is impossible to predict when markets will be up or down and thus impossible to know the ‘best’ time to invest, by saving regularly one can smooth out the market extremes. If you invest the same amount each month, when markets are up your contribution will buy fewer shares (or units in a fund) than when markets are down.
But by investing consistently, when prices are high and when they are low, you may end up with more for your money than if you had invested at an average price throughout (see separate blog post on ‘pound cost averaging’)
Do children have to pay tax?
Yes. Children are entitled to a tax-free allowance in the same way as adults. And, depending on their income, they may or may not be taxpayers. If their total taxable income is less than the tax-free allowance they are due, a form R85 (catch name HMRC!) can be completed so they receive their interest without tax taken off.
So long as the child does not become a taxpayer, they can continue to receive interest without tax taken off until the 5 April following their sixteenth birthday. At sixteen, they must complete a new form R85 and sign it themselves if their income is still less than their tax-free allowance.
Children under sixteen cannot sign the form R85 themselves.
A parent or guardian must complete form R85 with the child's details and sign it on his or her behalf. It cannot be signed by a grandparent, foster parent or trustee of the account unless they are also the child’s legal guardian.
The address on the form R85 must be wherever the child is living even if the person signing the form R85 lives at a different address.
Children:
•under sixteen in Scotland
•under eighteen in England, Wales and Northern Ireland
cannot apply personally to get their tax back. A parent, guardian or trustee must do it for them.
They do this by completing a repayment form R40 (another catchy name HMRC!) But if someone is claiming on behalf of a minor as a trustee (for example, a grandparent who holds a bare trust account such as Mrs Smith re Miss Smith – more on bare trusts later) they must enclose a statement of the minor's income and capital gains during the year of the claim. The minor's legal guardian must sign this statement.
What about the ‘£100 rule’
There are special rules if a parent has given savings to their child. Where gifts from a parent produce more than £100 gross income a year, the whole of the income from the gifts is taxed as the parent’s income. A child cannot claim back any tax on that income. Nor can interest be paid without tax taken off.
The £100 rule applies to young people until they reach eighteen or marry (whichever comes first).
The £100 rule applies separately to each parent. It does not apply to gifts given by grandparents, other relatives or friends.
What happens when a child becomes sixteen?
Once a form R85 is completed for a child's account it allows interest to be paid without tax taken off. So long as the child does not become a taxpayer the form R85 can stay in play until the 5 April following the child’s sixteenth birthday.
If a child does not expect to have to pay income tax after that date - because their income will still be less than their tax-free allowances - they can complete a fresh form R85 for interest to continue to be paid without tax taken off. The fresh form R85 can be completed at any time in the tax year in which the child will reach sixteen. A tax year runs from 6 April one year to 5 April the next.
If an account is not held in the child's name, for example, if it is in the name of a parent or grandparent, it must be transferred into the child's own name in time for the first interest payment in the tax year after their sixteenth birthday. If it is not, tax must be taken off the interest.
Yes. Children are entitled to a tax-free allowance in the same way as adults. And, depending on their income, they may or may not be taxpayers. If their total taxable income is less than the tax-free allowance they are due, a form R85 (catch name HMRC!) can be completed so they receive their interest without tax taken off.
So long as the child does not become a taxpayer, they can continue to receive interest without tax taken off until the 5 April following their sixteenth birthday. At sixteen, they must complete a new form R85 and sign it themselves if their income is still less than their tax-free allowance.
Children under sixteen cannot sign the form R85 themselves.
A parent or guardian must complete form R85 with the child's details and sign it on his or her behalf. It cannot be signed by a grandparent, foster parent or trustee of the account unless they are also the child’s legal guardian.
The address on the form R85 must be wherever the child is living even if the person signing the form R85 lives at a different address.
Children:
•under sixteen in Scotland
•under eighteen in England, Wales and Northern Ireland
cannot apply personally to get their tax back. A parent, guardian or trustee must do it for them.
They do this by completing a repayment form R40 (another catchy name HMRC!) But if someone is claiming on behalf of a minor as a trustee (for example, a grandparent who holds a bare trust account such as Mrs Smith re Miss Smith – more on bare trusts later) they must enclose a statement of the minor's income and capital gains during the year of the claim. The minor's legal guardian must sign this statement.
What about the ‘£100 rule’
There are special rules if a parent has given savings to their child. Where gifts from a parent produce more than £100 gross income a year, the whole of the income from the gifts is taxed as the parent’s income. A child cannot claim back any tax on that income. Nor can interest be paid without tax taken off.
The £100 rule applies to young people until they reach eighteen or marry (whichever comes first).
The £100 rule applies separately to each parent. It does not apply to gifts given by grandparents, other relatives or friends.
What happens when a child becomes sixteen?
Once a form R85 is completed for a child's account it allows interest to be paid without tax taken off. So long as the child does not become a taxpayer the form R85 can stay in play until the 5 April following the child’s sixteenth birthday.
If a child does not expect to have to pay income tax after that date - because their income will still be less than their tax-free allowances - they can complete a fresh form R85 for interest to continue to be paid without tax taken off. The fresh form R85 can be completed at any time in the tax year in which the child will reach sixteen. A tax year runs from 6 April one year to 5 April the next.
If an account is not held in the child's name, for example, if it is in the name of a parent or grandparent, it must be transferred into the child's own name in time for the first interest payment in the tax year after their sixteenth birthday. If it is not, tax must be taken off the interest.
Account Holding
So, with the child trust fund, it is in the child’s name, controlled by the parent and as long as the total invested in any year is less than £1,200 anyone can contribute.
With national savings there are different rules depending on the product and with deposit accounts it will depend on the institution chosen.
With stocks and shares, a designated account is one way of holding the investment – the fund is yours, so you have access to it and control over it, until the child reaches 18. The account is yours for tax purposes. With stocks and shares the account has to be ‘designated’ as children under 18 can’t own shares. This will typically be in your name with the child name in brackets afterwards, so for example Mrs Margaret Smith (Master Billy Smith)
Trust accounts (mentioned briefly above and also applies to stocks and shares)
The most common type of trust account held for children is a bare trust. Bare trusts can be called by another name, for example re accounts or nominee accounts. An example of a bare trust account is ‘Mrs Smith re Miss Smith’.
The fund is your child’s, held for them by one (or usually more) trustees (often parents or grandparents). The fund is the child’s for tax purposes from outset and the child gains control of the fund at age 18. Bare trusts are fairly ‘irreversible’ so you really are gifting the money away and pretty much losing any right to have it back.
A bare trust account held for a child can be registered for interest to be paid without tax taken off by completing form R85. The form R85 must be signed by the child’s parents or legal guardian.
So long as the child does not become a taxpayer, the form R85 can stay in place until the 5 April following the child’s sixteenth birthday.
After the child has turned sixteen the account must be transferred into their own name before it can be registered for interest to be paid without tax taken off. If the account remains as a bare trust account the interest must be paid after tax has been taken off.
Different rules apply where a child is mentally incapacitated. Where a child who is mentally incapacitated reaches the age of sixteen, and their account has been registered by their parent or guardian, the registration may continue for the future. If the account is not already in the child’s name, it is not necessary for the account to be transferred into the child's name, or for the account to be re-registered.
Trust accounts (mentioned briefly above and also applies to stocks and shares)
The most common type of trust account held for children is a bare trust. Bare trusts can be called by another name, for example re accounts or nominee accounts. An example of a bare trust account is ‘Mrs Smith re Miss Smith’.
The fund is your child’s, held for them by one (or usually more) trustees (often parents or grandparents). The fund is the child’s for tax purposes from outset and the child gains control of the fund at age 18. Bare trusts are fairly ‘irreversible’ so you really are gifting the money away and pretty much losing any right to have it back.
A bare trust account held for a child can be registered for interest to be paid without tax taken off by completing form R85. The form R85 must be signed by the child’s parents or legal guardian.
So long as the child does not become a taxpayer, the form R85 can stay in place until the 5 April following the child’s sixteenth birthday.
After the child has turned sixteen the account must be transferred into their own name before it can be registered for interest to be paid without tax taken off. If the account remains as a bare trust account the interest must be paid after tax has been taken off.
Different rules apply where a child is mentally incapacitated. Where a child who is mentally incapacitated reaches the age of sixteen, and their account has been registered by their parent or guardian, the registration may continue for the future. If the account is not already in the child’s name, it is not necessary for the account to be transferred into the child's name, or for the account to be re-registered.
Please remember that tax rules are subject to almost constant change. All the above is correct as far as we can be certain at the time of writing (E&OE). Values of tax reliefs will depend on your individual circumstances. I urge you to take individual professional advice to be certain of the best outcome.
Please contact me if you’d like to know more about saving or investing for your children or grandchildren.
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