Tax Implications on Chidrens Investment

sunil1234

Hi

I am opening two fund accounts with H-L:o for my kids to run alongside their pensions. One child is 3, the other is 4 months old. I am investing their cash savings to date (about £10k split equally between them). What tax issues could this cause in the future?

I havent invested it in mine or my wifes isa allowances as we have used those up and have funds wiating to go into each for the next 2 years (in fund accounts that will be bed-and-isa'd).

The reason for setting them up seperately was purely so we dont mix up the amounts they receive from gifts, child benefit etc with our money. We also didnt comitt it all to the SIPP so there is some flexibility before their retirement.

TIA

S

Reaper

I take it you are doing them in your own name and outside an ISA? If so it is taxed as your own money and you will pay capital gains tax, income tax, and possibly inheritance tax after gifting the proceeds. Rather than repeat myself see my post in this thread.

sunil1234

Reaper wrote: »

I take it you are doing them in your own name and outside an ISA? If so it is taxed as your own money and you will pay capital gains tax, income tax, and possibly inheritance tax after gifting the proceeds. Rather than repeat myself see my post in this thread.

well i am filling in a/c desination as that of my children (via H-L ) if that makes any difference? I did call them to ask about bare or execution trust forms as they mention it on the fund app form but they said i didnt need one to open the account........

Reaper

sunil1234 wrote: »

well i am filling in a/c desination as that of my children (via H-L ) if that makes any difference? I did call them to ask about bare or execution trust forms as they mention it on the fund app form but they said i didnt need one to open the account........

I am guessing you mean you have set them up as a "designated" account. There are 2 basic choices (and plenty of other obscure ones) for a child account, "designated" or "bare trust".

A designated account means it is your money that you have earmarked for your child. A bare trust on the other hand means it is your child's money which you are administering.

Designated acounts you can do whatever you want with. Even taking the money out and blowing it. With bare trusts there are stricter rules - the money is the child's and you are legally bound as trustee not to withdraw it except specifically for that child's benefit.

The main advantage of designated is flexibility. You can change your mind at any time. A big advantage of bare trusts is avoiding inheritance tax as you are giving the money to them gradually over time instead of in one big lump sum.

If any income tax is due on the proceeds it is taxed as if it is your money as soon as the income exceeds £100.

When it comes to capital gains tax the picture is less clear. I have had conflicting information from different companies and I could get no sensible answers out of the Inland Revenue.

Bare Trusts are definately ok for capital gains as they will use the child's allowance. Designated accounts are less clear. Some companies say it is still your money so will be taxed under your allowances, while I others (eg Jump Savings) claim the child's allowance will be used. It makes more sense to me that the parent's allowance is used as with designated you can change your mind at any time and decide not to give the money to the child after all, however I would love somebody to be able to give me a definitive answer.

If you do decide to go with a Bare Trust I suggest you pick a company that will set it up for you as if they won't you will have to pay for a solicitor to do it for you.