Discretionary trusts - Investing for child

monkeynook

Hi all,

Wandering if anyone with greater knowledge could help me on setting up investment account for a child.

Basically I want to be able to maintain control beyond 18, and to make it as tax efficient as possible, both income and on cap gains.

I'm looking to invest approx £1200 - £2000 per year from birth to 20 years and put this within a Stocks and shares index tracking account, ie vanguard life strategy or similar.

So.... obviously an Jisa would be easy but goes to child on 18th so not suitable. An junior investment account in child's name but this has tax implications?

What i want to avoid is having to re balance it, sell and buy again to avoid cap gains and filling out any tax forms if possible!!?

I have therefore been reading about discretionary trusts but these also have tax implications? Ideally i would like to shelter a JISA within this but assume thats not possible?

Any thoughts would be greatly appreciated!

Reaper

Discretionary trusts are a bit tricky. It would need a lawyer to draw it up (expect to pay up to £500) which the simpler options do not, and you would need to check you understand the tax rules

The simpler options that come to mind are:
1) If you have unused ISA allowance put in in your own ISA and gift it whenever you wish to.
Advantages: Tax free (except IHT, see next point), flexible
Disadvantages: You need to specify the money is to go to the child in your will in case you don't make it to your target date. The proceeds would also be subject to inheritance tax if your estate reaches the threshold.

2) Use a Bare Trust with Baille Gifford. Controversially (see other threads on the subject) they allow you to continue it past age 18. The child can insist on getting the money after that age but it would require them to have the knowledge and desire to take you to court.
Advantages: No laywer needed, most Investment Trust companies will set it up for you for free. Less chance of being stung for inheritance tax as the date the money is given counts, not when the child receives it, and it falls out of the calculation on a sliding scale over 7 years.
Disadvantages: Not quite tax free. Any income from it counts as the child's income UNLESS you are the parent in which case when it exceeds £100 the whole lot counts as your income (true of almost all child saving/investments). If it counts as the child's income remember although as a child they are unlikely to need to pay any tax on it since you plan to continue it past 18 they may get a job and reach the income tax thresholds.

bowlhead99

I agree discretionary trusts can be tricky, and more complex/ expensive to administer and file tax returns for them.

The most common things people seem to do here is either:

a) use their own tax allowances to invest efficiently in their own name (S&S ISA, pension, VCT etc), and simply track the growth and decide what they want to give away later. Upside - complete control ; downside - you are using up your own tax allowances and not making any gifts until closer to your potential death, which may be a negative point for inheritence tax planning.

b) simply invest your own money, not in any wrapper, in your own name or in a 'designated account' which you will give away as a gift at your discretion some point later. Pay the taxes yourself whenever they're due. Upside - complete control, and if the income is dividend rather than interest and you're not a higher rate taxpayer there may never be any tax to pay anyway, so you don't need to waste your own tax allowances on putting it in a wrapper; Downside - same IHT point as above and the fact that depending on performance and types of assets held, there may be income tax or CGT that could have been avoided. Also you have to keep records of purchases etc to support any potential tax returns.

c) Junior ISA; Upside - this wrapper lets you forget about all taxes completely, assets are outside your estate for IHT, and for means tested benefits, and for creditors chasing your in bankruptcy etc; Downside - child can control at age 16 and cash out at 18, also child can only have one of them at once which is more of a headache if multiple people want to track what they each gave.

d) assets gifted to child in bare trust. Upside, takes it out of your own estate as with option (c), but this time making use of child's own annual income tax and CGT allowances rather than a specific wrapper. Downside, child can demand access at age 18, a potential tax on investment income if exceeds £100 and funded by parent (mentioned by Reaper above), need to keep records of transactions to support any potential tax reporting as with (b) above.

You usually find people suggesting the ISA as the best because of the tax certainty and the fact that you have 18 years to educate the child not to blow it all at once on something you think is inappropriate. The latter point is inevitably something that people worry about, but in a lot of cases it will end up being a fuss over nothing. The 18 yr old is told the £40k or whatever is technically in his name to keep it tax efficient and therefore as large as possible, but he is supposed to spend it on XYZ items otherwise [insert threat here], and the teenager will be very grateful and accepting of it.

Without wanting to open the same can of worms from the last Baillie Gifford bare trust thread that Reaper and I were on - the fact that a bare trust can remain in force beyond age 18 is not really "controversial". Assets can be held for adults through bare trust, whether or not the trust was first created when the person is a child. But effectively if you are holding something as bare trustee for someone and they are over 18 you have to tell them it exists and they have the right to give you instructions which you must follow (e.g. buy this, sell that, transfer this into my own name). Individual brokers or banks who are holding the trust assets will deal with the trustees and not the beneficiaries.

When investing for kids, if you can get over the point about ceding control to them when they become adults, the 'bare trust' method is quite neat. Certainly cheaper and easier than a discretionary trust where the beneficiary is not defined and the trustees have to pay tax themselves. Despite the "£100 investment income rule" for parental gifts, some will prefer a bare trust over a JISA because of restrictions on when JISAs can be cashed out or the annual amount that can be added to them (e.g. £2k a year is fine but £10k every 5 years when you get windfalls or inheritances, is not)

Personally I am investing tax-inefficiently in a designated account for niece and nephew which is still taxable on me - the price I pay for total control forever. So if want to re-split it between new nephews and nieces or even take some of it back to pay for my own affairs, I could, depending on how the next couple of decades play out. A bare trust or JISA (if the kids were in the UK and qualified for JISAs) wouldn't achieve that, and a discretionary trust is expensive for the amounts involved while still (potentially) not making all the taxes go away.

Mattygroves2

Excellent post by Bowlhead.

I too think you may be over stating the risks of passing the money over at 18. My OH invested a fairly substantial sum for both his sons in a bare trust arrangement and although they were told about it at 18, and it was transferred into their names, they weren't interested in it then. It was gradually put into ISAs in their own names using the bed and isa route to avoid CGT and they have both used part of it to help fund house deposits in their late 20s. I think they've still both got some of the funds now in their mid 30s.

We had the investment statements from the broker delivered to our house (which isn't where they were living) even when the funds were in their name and it was my OH who had the contact with the broker so although they could have certainly sold the funds themselves it was a hassle to do so and would have involved asking their Dad to help sort it out. This may have been enough to prevent silly spending although they are both fairly sensible.

xylophone

OP is the parent?

https://www.gov.uk/trusts-taxes/parental-trusts-for-children

If setting up anything other than a bare trust, professional advice would be advisable.

http://www.step.org/online-directory