F&C CIP vs. Junior ISA

DFWATTS

All,


I'm hoping for a little insight here regarding two child investment plans that I opened for my kids back in 2014....


I opened a couple of CIPs back in July 2014 as I wanted to create a nice little lump sum for when the kids grow up, but not being the smartest when it comes to finance I didn't realise at the time that there are potential tax implications. We're not saving a fortune - just GBP 100 / month for each kid, but over the past four years the plans have grown relatively well. Thus far:-


Money In - GBP 100 x 51 = GBP 5100; with each fund now worth GBP 6450.00.


Now I'm not exactly a Gary Barlow or a Jimmy Carr when it comes to complex tax avoidance schemes, and in fact the situation I find myself here has me worried! Ridiculous perhaps I know, but I like everything to be above board!



So the questions I have are:-


a) Do I owe any tax, and if so how do I arrange payment of this?
b) Are there any other savings plans (ideally stocks & shares related) that I can transfer these policies to that are tax free?
c) How do you save for your children?


Many thanks in advance for your help.


D

Alexland

You may find the below article useful. Assuming you have no other direct investments, your dividends have been below £2k per tax year and you haven't sold the shares yet so it's too early to consider capital gains tax. If your investment does very well you might need to spread the asset sale trades across multiple tax years. These rules might change in future so keep an eye on them.

https://www.moneyadviceservice.org.uk/en/articles/your-tax-rate

Junior ISAs are much simpler with no tax on dividends or capital gains however you cannot make withdrawals and the child may take control of the account from age 16 and withdraw from age 18.

https://www.gov.uk/junior-individual-savings-accounts

I setup both a S&S JISA with 2 tax years of lump sums (worth around £9.5k now with no intention to add more) and a regular child investment plan (not in Bare Trust) for my son. However we are only making a £50 per month contribution so it is dwarfed by our other accounts and I have decided to close it early and just use our adult S&S ISAs (which we struggle to fill each year anyway). My wife is pregnant again and the new child will just get a S&S JISA which should take 3 tax years to fill to the same level (unless there is a market crash which would make it quicker) and will remind me of the importance of bringing them up well not to waste their money.

Alex

bowlhead99

There are generally a couple of different ways money can be held for children when you are putting money away for them in investment plans.

One is a 'bare trust' arrangement where the kids are beneficial owners and you are the trustee - you can set this up by filling out the application form for the product. In this situation the money belongs to the children and any tax consequences are for them to deal with using their own annual allowances and exemptions (which are the same size as adult allowances: £11,850 personal allowance for general income, £2,000 for dividend income, £1000 interest income (£500 if higher rate taxpayer), £11,700 annual capital gains exemption etc).

Another way of doing it is a 'designated' account where the money is not technically the child's and belongs to you - not as a trustee for them, but literally you are the beneficial owner - but you put a 'designation' or some identifying letters on the account name to help you remember that you have earmarked it to be given to that child in the future. In that situation if you make any profits the consequences are for you yourself to deal with out of your own tax allowances and exemptions with tax to pay if you make more than the allowances.

So, tax consequences will be a little bit different depending which route you went when opening the accounts.


Assuming these plans are in a bare trust arrangement (i.e. the kids are the beneficial owners now, rather than you pay into the plan for yourself and merely designate that the money will be given to each child at the end when you feel they are old enough), then :

a) Do I owe any tax, and if so how do I arrange payment of this?

No, there is unlikely to be any tax due at this level of investment, though could change as the balances grow.

Firstly as you may know, investing can give rise to two types of tax:
1) Income Tax (receiving dividends or interest from the investments, which might be spent or reinvested to buy more shares);

2) Capital Gains Tax (CGT - a share growing in value to be worth more money, and eventually sold for more than you paid for it, realising a gain)

For capital gains tax: if you sell investments in any one tax year for more than £11700 more than was paid for them, there can be CGT to pay (first £11700 of the gains realised in any one year by its beneficial owner is exempt, but the rest is taxed at 10 or 20%). At the moment, there haven't been any sales, so the capital gains are £0. The investments have gone up in value 'on paper' to be worth more than you put in, but no shares have actually been sold for more than was paid for them. You could say that this is building up a problem for the future because eventually you will sell the shares, but you can sell them in multiple tax years to take advantage of the annual exemptions.

For income tax, there won't be any significant income (dividends or interest) earned, because the annual dividends earned from a few thousand of investments are not going to be in the thousands, and they would be well within the child's allowances.

However there is a special rule for investment income earned by children. If a child gets income of over £100 a year from a settlement funded by their parent, the income is taxed as the parent's rather than the child. This is to stop people putting all their own money in their children's names to use up thousands of pounds of their children's personal tax allowances for the benefit of the family - knowing that the children are not using those personal allowances for employment income etc - which would be a great dodge. So as the income gets large, if it came as a result of a parental settlement it is simply taxed as if it was the parent's own income. Practically speaking if it was jointly contributed by two parents the limit would be £200 per child.

So, this means that whether:

i) you have put the monthly money into an investment plan as 'bare trust', and the income is rightfully the kids' income as beneficial owner of the plan ... or

ii) you have put the money into a plan where it's merely 'designated' for the kids but is not an official trust arrangement, so it is all your money at the moment...

...eventually the income arising in the accounts will be treated by the tax man as being your income. Either because those dividends are literally your income (path ii in the above paragraph) or because they're the child's income but over £100 so treated by the taxman as being your income (path i in the above paragraph).

With the dividends being taxable on you, you will need to look at the account statements to see what dividends were earned, which obviously varies depending on the funds or investment trusts you chose. For example if both children have £6000 of current value and the investments are giving off about 3% dividends (£180 being received, and probably reinvested, each year), you will have £360 of income between the two kids' accounts.

As you have a £2000 dividend allowance (which used to be a £5000 allowance before the last round of tax changes), that's probably fine if you don't have lots of other investments in your own name. And if for example half the money came from the other parent then neither child is making over £100 of income per parent and is below the threshold for it even being treated as parent's income.

But clearly these amounts could go up as you add more money over time and the accounts have the benefit of long term investment performance so it is wise to look at other options

b) Are there any other savings plans (ideally stocks & shares related) that I can transfer these policies to that are tax free?

Yes, most mainstream providers offer a 'Junior ISA' account; you may find that the provider of your current child investment plan does offer this, or you could cash in and transfer the money to someone who does. Any income and gains made in a JISA account are free of UK income tax and capital gains tax (and as the income is not taxable at all, there is no risk of it being reallocated to the parent to pay tax as if it was the parent's own). Each child has a £4260 JISA allowance so you could move part now and the rest after 6 April 2019 when they get their next annual subscription allowance.

The downside of a JISA is that it can only be accessed when the child is 18 and not if they need it earlier. The child can take the money out at 18 (whether you want them to or not) ; they can keep it invested longer than that if they want to (it will simply convert into an adult S&S ISA) but neither you nor they can get hold of the money before the 18th birthday. It could be transferred into lower-risk funds to avoid any loss of value, but couldn't be taken out as cash before that point.

Due to the restricted nature of the JISA (which you might not like if you want earlier access, or if you don't want your kids to get the money at 18 without your permission), you may prefer to look at other options.


For example, if the current CIP money is not in a bare trust account for your kids to get at 18 because you don't want them to have it then, and instead you are just using a 'designated account' where you are the beneficial owner yourself, then you can do pretty much whatever you like with it. For example you could put it in your own S&S ISA.

You and the kids' other parent have £20,000 of annual ISA subscription allowance each (and will get another £20,000 next April and so on) and so many people find they have capacity to invest tax-efficiently for their kids as part of an investment plan they are doing for themselves. E.g. £100pm for the kids, £100pm for themselves, half of the money is the kids. It can get complicated if you want to withdraw some money for yourself and not for them, as the ratios will change from 50:50 so you'd have to keep track.

Similarly you could invest very efficiently in your pension. Instead of doing the CIP plan, you could increase your pension contributions by £200pm and then when you are in your late 50s and your kids have grown up, withdraw it and give to them. You could do this just by using your normal work pension scheme, though if you want to track it separately you could upen up a self-invested personal pension at £200pm.

The pension route has potential to be more tax efficient than an ISA because as well as the income and gains from the investments not being taxable, you also get income tax relief which is particularly useful for a high rate taxpayer or someone who would get more child benefit if they had a lower income due to extra pension contributions. However, unlike an adult ISA which is instant access, there would be no access until you reach the age that you can access personal pensions (currently 55 but widely expected to increase by a few years by the time we get there).

c) How do you save for your children?

I don't have kids myself - just saving for neices/nephews at the moment- so that removes any complication from a child's income being treated as my own if it goes over the £100 limit. But to retain the maximum flexibility I keep the money in my own name rather than in trust for them or in their JISA.

So the money is spread within my personal ISAs and pension and I will give it to them when I think they need it or are old enough to use it responsibly (which might be older or younger than 18, so I feel that adding to the JISA that their mum set up would not be ideal).

Alexland

Finally just to add (as bh's answer wasn't as comprehensive as usual....) if you are a parent in your late 30s then consider opening a S&S Lifetime ISA before 40 and you can contribute up to age 50 with a 25% government bonus for withdrawal at 60 when your children might be sniffing around for help with weddings or house deposits in their early 20s. Thats part of my plan.

Alexl

bowlhead99

Alexland wrote: »

Finally just to add (as bh's answer wasn't as comprehensive as usual....) if you are a parent in your late 30s then consider opening a S&S Lifetime ISA

I did consider adding it to the lengthy answer but if the OP is still under 40 (to qualify for the LISA) and has been saving for the kids since July 2014, he definitely wouldn't be able to get the money back from a LISA without penalty before he is 60, by which time the kids are minimum 24 - and he didn't indicate he was even thinking about investing past the point when they were no longer kids. By contrast, a 45 year old could put money into a personal pension and get it back in 10-15 years.

You're right that people should explore their options. For a much longer term, put money into a kids pension and they can have it back in 60+ years! Though may not thank you for selecting that method without exhausting the others, as earlier lump sums can be more useful.

Alexland

bowlhead99 wrote: »

You're right that people should explore their options. For a much longer term, put money into a kids pension and they can have it back in 60+ years! Though may not thank you for selecting that method without exhausting the others, as earlier lump sums can be more useful.

Yes and although there is some tax advantage to filling a child pension it doesn't really feel right to be using up their lifetime allowance and it's nice to leave something for them to achieve on their own. I am ambitious for my son an expect him to be generating a high enough income to use his own allowance.

Alex

DFWATTS

Guys, I cannot thank you enough. Really appreciate your help. Dan