How to give them a financial head start in life as they grow up in the modern world

Anyone with children knows there will be lots of demands on the household finances, but when it comes to long-term saving, perhaps for university or a first home, even a small sum can give your child a financial head start in life over a long period of time. With this in mind, the Association of Investment Companies (AIC) has taken a look at long-term investment company performance, and what to consider when investing for children.

 

Long-term investment company performance
Investment companies are not just for the wealthy few, but can suit a variety of budgets: contributions start from around £50 per month. An investment of £50 each month in the average investment company has grown to a considerable £28,584 over the last 18 years.

A lump sum investment of £4,080, the full Junior ISA limit for the tax year 2015/2016, in the average investment company eighteen years ago would today have grown to £18,135. If an investment of £4,080 had been made each year for the past eighteen years, this sum would have grown to an impressive £195,384.

How does it all work?
Young children can’t hold shares in their own name, so a scheme can be set up on their behalf. Investment company shares can be held in a designated account, where shares are held in the name of the parent/guardian/benefactor but it is stated on the application form that shares are held on behalf of a child (by adding the child’s name or initials to the form). An advantage of choosing this way to save for a child is that the shares are under the control of the adult until they decide to transfer them to the child.

In a bare trust, shares are held for the benefit of the child and therefore the parent or guardian has no entitlement to the income or proceeds. No income tax or capital gains tax will need to be paid if investments are made via a Junior Individual Savings Account (ISA) wrapper, with an allowance of up to £4,080 annually in the 2015/2016 tax year. The investments belong to the child but cannot be accessed until they reach eighteen, at which point, in the case of Junior ISAs, the account will be converted to an adult ISA.

What are the tax implications of investing for children with investment companies?
If an investment company is held by an adult via a designated account, then the shares will be deemed as belonging to the adult and will be taxed according to the adult’s income and capital gains tax liabilities. If investment company shares are put into a bare trust, then they are held for the benefit of the child, who will have their own income and capital gains tax annual allowances to reduce any tax liability.

However, if any investments made on behalf of a child by a parent generate an income of £100 or more a year, then the income will be deemed to belong to the parent/guardian who created the trust and income tax may be payable. This does not apply to contributions to a Junior ISA, or if the money was given by another relation to the child, or a friend.

Do you understand the Inheritance Tax implications?
If you decide to make a gift to your children you should make sure you understand the Inheritance Tax implications. You should consider taking professional financial advice if you are not sure about how to invest, what type of investments might be suitable and the tax consequences.

Investment companies are popular for saving for children, because there is a plenty of time to benefit from the long-term potential of the stock market whilst riding out some of the market highs and lows along the way. By investing in a range of companies on your behalf, investment companies offer professional fund management and spread your investment risk.

Source data: Performance data is share price total return to 30 April 2015, and mid-market share price on a total return basis. No expenses taken into account. Source: AIC using Morningstar. The Association of Investment Companies (AIC).

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
IT DOES NOT CONSTITUTE INVESTMENT ADVICE OR PERSONAL RECOMMENDATION AND IS NOT AN INVITATION OR INDUCEMENT TO ENGAGE IN INVESTMENT ACTIVITY. YOU SHOULD SEEK PROFESSIONAL FINANCIAL AND, IF APPROPRIATE, LEGAL ADVICE AS TO THE SUITABILITY OF ANY INVESTMENT DECISION.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.