Investment Bond Tax

Snich76

I have a lump sum of £10k which was left to my 3 year old daughter by my mother (her grandmother). Rather than dumping it into a child savings account getting 2.5% per annum, I was thinking about ways to use the money better to get a better return as it will be there for 18 years. One thing that occured to me was to invest it into an Investment Bond (in my name) and either:

• Leave it there for 18 years then withdraw all of it once she turns 21 to give to her (which may or may not attract tax?), or
• Leave the capital in there but withdraw the tax free limit of 5% each year and put it into her government opened CTF (Child Trust Fund), hopefully it will see an average of 5% growth each year so I would just take out the interest (up to 5% for tax reasons) and leave the £10k there so when she is 21 she will have the original capital of £10k plus another £9k in accumulated tax-free interest (18 years @ 5% per year)

The above does sound too good to be true so I'm sure there are numerous issues with this plan which I haven't considered and you will give me a long list of reasons why it wont work but was wondering if anyone here had any comments and could point out the drawbacks of my otherwise cunning plan, or more importantly offer an alternative to get as good a return as possible with no or little tax

P.S. My attitude to risk is low/medium (low because its her money and if the original investment is less in 18 years then I would be making up the deficit myself as it would be unfair for her to have less inheritance because of my decision), but medium because I realise there needs to be an element of risk for good returns. I may be speaking to my IFA soon but would appreciate any advice from the experts here...! Also, I have already used my and my wifes ISA limit (£10,680 each) in a S&S ISA this year so another option would be to wait until next finanical year and assuming that is going well, add it to that and after 18 years pro rata any interest and give it to her then - is this even legal or is it tax evasion??

Snich76

Any advice would be appreciated.

Ark_Welder

One of the downsides with investment bonds is that the fund has to pay the equivalent of basic-rate tax on its investments, and an individual cannot reclaim this so they are not usually suitable for a non-taxpayer. Another downside is that tax may be payable by the investor, i.e. you, when the bond is cashed in - that will depends upon your tax band at that time.

http://www.which.co.uk/money/savings-and-investments/guides/investment-bonds/investment-bonds-tax-issues/
http://www.pru.co.uk/investments/guide/taxation/
http://www.thefundsupermarket.co.uk/Investment_bonds.htm


If I were in your situation then I would probably park the cash in either an easy-access account for now and wait to see what is available once the Junior ISA's are launched in November. This will also give you time to have a look into the options in a bit more detail.

Without trying to pre-empt what might be available, and due to my hesitatation in using the phrase 'cautious or balanced managed', a fund that can swap between asset types might be appropriate - but trying to avoid fund-of-funds in this area because of the additional layer of charges. (although there are a few that do seem to be worth the extra).

Regarding the income from the fund, compounding is usually far better, especially over longer periods.

charlieboycat

Obviously you have a duty to invest it wisely on your daughter's behalf, but surely if it was left to your daughter then legally it is hers and has to be invested in her name, or maybe in "[father's name] as trustee for [daughter]" - not yours?

dunstonh

investment bonds are geared more for 100k plus investments (partly due to tax and partly due to charges). So, I expect a £10k investment would not result in an investment bond recommendation.

Snich76

Thats some good advice. I was not even aware of Junior ISA's so that is definitely something I would use as like Charlie said, it would be preferable to keep it in her name (the only reason to keep it in mine was to maximise the return). I think I will use the £3k allowance on release, put the balance of £7k into a fixed rate bond/savings until the following financial years then transfer the maximum allowance in again each year.

jamesd

That plan to invest via CTF seems like a good one, as would be using the Junior ISA if it allows using it for investments, as looks likely. It's also good that you're not just sticking to savings accounts but taking your responsibility to invest at least well enough to keep up with inflation and possibly grow seriously. You might review the withdrawing interest plan, though, leaving it in the investments to grow is probably a better idea.

Snich76

I have two quick questions if someone would be good enough to answer them:

• With Junior ISA's, I note that it is made availbale to the "junior" when they are 18 years old. Is this essentail or can the age with which the money is released be increased (as the terms of the will were that it should only be released to her when she is 21)? Could I simply not inform her of the account until she reaches 21 or by law does she need to know about it? Does it remain as a "Junior ISA" after she reaches 18 or does it get automatically switched to a regular ISA in her name at 18yo (in which case she would no doubt need to know about it?).
• If I was to use the Investment Bond but leave the capital and interest in there without drawing any out, could I then withdraw the balance (capital plus interest) after 20 years without incurring any tax (as I hadnt used the annual 5% tax relief)? If I was to leave the money in my name then give it to her when she is 21, does anyone have any alternatives to an investment bond which gives a good return (We have already used up our allowance for S&S ISA's)

Basically I think the junior ISA is the best scenario but dont want the funds to be availbale to her until she is 21, not 18. Is this possible? If the age can be increased that would be ideal, or alternatively if possible we simply wont tell her about the account until she is 21, but if it gets switched to a regular ISA at 16 or 18 Im assuming she will need to sign something which means she would know about it.

RETROSPECTIVE EDIT TO THE ABOVE: After doing some research, I have discovered that as my daughter was born in 2007 and has a CTF, she isn't qualified to open a junior ISA. Apparently, only children under the age of 18, resident in the UK, and born before September 2002 or on or after 3rd January 2011 who didn’t qualify for a Child Trust Fund are eligible for a Junior ISA. The CTF deposit limit will however be increased form £1200 per year to £3000 per year to match the JrISA. Just posting this information for anyone else who comes across this thread wanting info on Junior ISA's.

jem16

Snich76 wrote: »

If I was to leave the money in my name then give it to her when she is 21, does anyone have any alternatives to an investment bond which gives a good return (We have already used up our allowance for S&S ISA's)

How about unwrapped investments?

For an amount such as £10k an investment bond is not suitable owing to its higher charges and the way it is taxed. Unwrapped investments would be better cost wise - you would need to keep more of an eye on it to make sure you don't suffer CGT but should be possible with a few fund switches over the years.

jamesd

You should forget using an investment bond. It's completely unsuitable for this purpose and amount of money.

It's very unlikely that the rules for a Junior ISA will allow you to meet your obligation to prevent her from having access until age 21.

jem16 seems to be on the right track with investments held in trust outside a tax wrapper.

dunstonh

If I was to use the Investment Bond

Why do you want to choose an inefficient tax wrapper?