Best child savings account for grandparent gift?

astonmartinv8

Hi There,

My Father wishes to give his grandchild £20000 as a gift. We all understand the IHT implications and are happy with them, we also understand that a gift from a grandparent is not treated as part of the parents taxable income, but the childs.

We want a monthly interest term account. I have two questions - first, can I just open the best term account I can find and then fill in the R85 form or not? And second, what are the best child accounts out there?

Thanks,

Marcus.

john_s_2

Interesting that it's a monthly interest account that's wanted. I assume, therefore, this gift is intended to provide an income, rather than accumulate into a nest egg?

Also, how old is the child? I daresay some accounts won't be available below certain ages.

If it's income that's wanted then maybe something like bonds (gilts) would be a wiser choice? As you are doubtless aware, savings interest rates are historically quite low at the moment, and arguments have raged on other threads about this. The perceived wisdom is that savings accounts aren't designed to generate regular income.

I think the reason a lot of people took savings accounts instead of 'safer' products like bonds, is because savings accounts were paying higher interest. But with certain bonds, you know what the interest rate is going to be for the rest of its term (which can be as much as 30 years, or even for ever in some cases I think). Fixed term savings accounts rarely offer fixes beyond five years.

If it is income you're after then you'll need to consider inflation as well. I think there are suitable products that can accommodate this as well. If you state what the intention is then someone will be able to suggest something suitable.

In short, is it to provide a nest egg in the future, or an income now?

How long is this intended to last? (5 years, 10 years, 18 years...)

astonmartinv8

Thanks for this John S.

The child is less than one year old. Monthly income is preferred at the highest rate as the money may be spent on the child now whilst maintaining the capital for later.

I think we can plan on 1 year unless there is an advantage to longer. The higher the guaranteed return over a minimum of one year the better.

Cheers.

YorkshireBoy

astonmartinv8 wrote: »

Monthly income is preferred at the highest rate as the money may be spent on the child now whilst maintaining the capital for later.

What about inflation, which will erode the spending power of the £20K over time?

astonmartinv8

YorkshireBoy wrote: »

What about inflation, which will erode the spending power of the £20K over time?

This is understood and it is acceptable for spending power to be eroded in the short term.

YorkshireBoy

Short term? The child is less than one year old.

john_s_2

astonmartinv8 wrote: »

The child is less than one year old. Monthly income is preferred at the highest rate as the money may be spent on the child now whilst maintaining the capital for later.

I think we can plan on 1 year unless there is an advantage to longer. The higher the guaranteed return over a minimum of one year the better.

I *think* child's interest up to £100 a year is not regarded as part of the parents' income. It would only require an interest rate of 0.5% to generate that. Even in today's climate that's a pretty poor savings rate.

Might be worth confirming the income tax situation with someone who knows about such things. I have a hunch that spending the money yourselves could be regarded as taking the income as your own rather than the child's. To be blunt, infants don't usually buy their own nappies.

That aside, if you want the highest possible return each year then go for the highest one year fixed rate account. But you'll need to accept there might be times when savings rates are relatively poor (like now for instance!) As already pointed out above, if your child uses all the interest as income then the capital (20K) will be eroded by inflation. For example (if my maths is correct, which I doubt), if inflation is a steady 5% then 20K will be worth a little over 8K after 18 years. Or to put it another way, you would need about 48K to buy the same amount of goods that 20K could buy today.

I daresay there are products that would offer a better rate on average over the course of 18 years (which I assume is when you intend your child to get the capital back). But these will carry their own risks and not as straightforward as a regular savings account. I'm sure someone else on here can give more advice about this side of things.

astonmartinv8

It will be a gift from a grandparent and the money will be for the child. There is no taxation issue.

Yes, short-term because that is what is needed.

The issue about inflation is understood.

Hope that helps.

john_s_2

I'm clearer about the tax issue now - I've just checked my 2004 edition of the Which? 'Be your own Financial Adviser' and it says (pg 388) if you give money to your own child, any income it produces counts as your income, not the child's, except for the first £100. (Abridged.)

However, it goes on to explain this is only money from parents. This is what I was thinking of so apologies for any confusion. It does advise to have some sort of evidence (such as a letter from the grandparent) as evidence that the gift wasn't from a parent, in case HMRC enquire.

YorkshireBoy

http://www.hmrc.gov.uk/tdsi/children.htm is one of several HMRC guidance notes applicable.

However, where the interest is to be paid, ie in whose name the account is held, could be a problem.

You might want to search further on the HMRC site or give them a ring to be sure.

martinman3

The highest paying 1 year fixed rate bond I found, using www.moneyfacts.co.uk , which pays monthly interest and allows you to open it in trust for your child is from Norwich & Peterborough at 3.10%
http://www.npbs.co.uk/savings/fixed-rate.asp

You will need an instant access child's account to receive the monthly interest payments which should also be held by you in trust for your child so that you can withdraw the monthly payment from it.

The fixed rate bond needs to be opened in trust for the child (or a child's account but there are no such accounts paying monthly interest) as it is your child's money. Open it any other way and HMRC will consider it to be yours. Don't forget the R85 form.