Stocks and Shares ISA for a Child

red.barchetta_2

Hi,
Apologies is this is already discussed.
I am looking to get my son (16-yrs) a Stocks and Shares ISA, part from his savings he has acquired from birthdays over the years, and the rest mine as a gift (3K). We are looking at £5k investment.

So my question is, how is the gain deemed by HMRC?

I fully understand that there is no need to declare anything to HMRC when it comes to an ISA, but when you read their blub it says:-
"If you give your child money to invest in an adult ISA account, and the total investment income arising on all gifts from you, not just in adult ISAs, exceeds £100 in any tax year, all the income arising will be treated as part of your income for that tax year for Income Tax purposes. You should report that income to your Tax Office."

So say my son invests in an Stocks and Share ISA which in one year (hypothetically) grows by 5%, as this is part his and part my money - do I need to declare this??? The gain on my gift element of £3k would be £150.

Thanks,
Red.

westy22

Under 18's cannot have a S&S ISA, only an adult cash ISA or a JISA, which can be S&S but has a lower annual contribution limit (£4,000 from 1 Jul)

jimjames

Does he qualify for a junior ISA? That can hold shares.

However you seem to be misunderstanding how shares work. If the share grows 5% that is capital growth not income so is taxed under cgt if not in an ISA. Outside an ISA the annual limit is over £10k so £150 hardly registers on the scale and no tax would be due.

bowlhead99

Westy is right, the only type of adult ISA a 16/17 year-old can have is a Cash one.

There is a general anti-avoidance rule to stop families putting their cash savings in their kids' names to avoid paying tax on their interest income. This applies to other cash savings products like normal bank accounts as well as to any adult ISAs held by the child.

So the idea is, if a parent gives £3k to the child who then earns £150 bank interest from it (whether in a taxable account to use up the child's annual income tax free allowance, or in an adult cash ISA to sidestep income tax altogether), then HMRC will consider you are trying to abuse the system because normally, family money is owned by the parents who have their own income tax bands and ISA and pension limits, and they shouldn't be able to get more tax free income by putting things in the name of their kids and pets etc...

So, on the HMRC website where you saw the FAQ, it does remind you that income earned on a child's adult ISA is something that comes into this calculation. Because the only type of adult ISA a child can have, is a Cash one, and the interest earned has to come into the general calculation along with interest earned on other bank or building society accounts.

A child's Junior ISA however is outside the scope of this rule. They deliberately created a tax exempt savings and investment product which beneficially belongs to the child and is not taxable no matter what the source is. A Junior ISA can be Cash OR S&S.

So, if you have a £3k gift to give the child, they can stick it in a JISA and invest in stocks and shares with absolutely no tax consequences. They could stick £3840 into it this year (so your 3k gift plus other cash they have hanging around from other sources). They could then put the other £1000-1200 ish that they have hanging around, into it next April when they get another allowance.

Meanwhile they could put their £1000 into an adult cash ISA (probably not the best place as interest rates are low) or the best other child saving account they can find. Or they could buy investments with it outside an ISA. As they're under 18 they couldn't legally own shares products themselves outside the special JISA wrapper, but you could hold shares or investment trusts on their behalf, for them, in bare trust. If they are in bare trust they belong to the child at 18.

Any income and gains on stocks and shares unwrapped accounts that belong to the child and were not bought with parents money would be taxable on the child. But presumably the child is not a high rate 40% taxpayer, so there is no additional tax to pay on dividends received, and the realised capital gains on selling shares are not going to be in five figures so would easily fit into an annual CGT allowance.

red.barchetta_2

Thanks bowlhead99 for the comprehensive explanation.

From my side, gifting the money to him now, isn't to claim it back from him later in life, but rather, to start him up by having this money, to spend as he so wishes when he is at university.
I do however understand how HMRC may view movement of this gifting as a means for me not to pay the tax due by the parent.

I therefore think the JISA is the best approach, and as you state, it becomes his money on his 18th birthday, with no tax consequences whatsoever, via the gifting process.

So thank you for this clarification.

Would you, or anyone else, know if Premium Bonds come into the same category in terms of gifting money to children?

Are there any HMRC restrictions in how many PB's a parent can buy the child? I can't seem to find anything relating to this on HMRC.... I do understand that at the age of 16, the child operates his/her own PB's and therefore all proceeds are theirs, but can a parent still contribute to their purchases and if so, any tax implications?

Thanks to all responses thus far.
Red.

xylophone

The £100 rule relates to interest earned (outside tax privileged accounts) on money gifted to children by parents. http://www.money.co.uk/article/1007483-gifting-money-to-your-children-faqs.htm

http://www.hmrc.gov.uk/manuals/saimmanual/saim2430.htm

Premium bonds do not earn interest. Once the child becomes 16, he applies for PB's for himself. http://www.nsandi.com/savings-premium-bonds

The prizes are tax free.

If you are gifting £3000 to your child outside the JISA, and it is applied to non-interest bearing products, then the gift would be treated as here. http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm

RickyC_IFSWP

red.barchetta wrote: »

Thanks bowlhead99 for the comprehensive explanation.

From my side, gifting the money to him now, isn't to claim it back from him later in life, but rather, to start him up by having this money, to spend as he so wishes when he is at university.
I do however understand how HMRC may view movement of this gifting as a means for me not to pay the tax due by the parent.

I therefore think the JISA is the best approach, and as you state, it becomes his money on his 18th birthday, with no tax consequences whatsoever, via the gifting process.

So thank you for this clarification.

Would you, or anyone else, know if Premium Bonds come into the same category in terms of gifting money to children?

Are there any HMRC restrictions in how many PB's a parent can buy the child? I can't seem to find anything relating to this on HMRC.... I do understand that at the age of 16, the child operates his/her own PB's and therefore all proceeds are theirs, but can a parent still contribute to their purchases and if so, any tax implications?

Thanks to all responses thus far.
Red.

Your son may have to buy the premium bonds directly. You could always help him fill out the form, ask him to sign and you pay for the PBs. PBs are tax-exempt so you shouldn't have to worry about tax.

There could be inheritance tax to worry about, but you have an annual gifting exemption of £3k from your capital and both husband and wife has it. So... unless you plan to gift a lot, don't worry.

red.barchetta_2

Thank you to everyone who have contributed. Your input is much appreciated.
Regards,
Red.