Withdrawing from a childs bare trust and moving to an ISA in parents name.

xylophone

Sorry Xylophone - I am not understanding what is meant by The income arising on a parental settlement?

A "parental settlement" arises where a parent gifts money or assets to his minor unmarried child.

Income on such gifts is subject to the £100 rule.

See https://webarchive.nationalarchives.gov.uk/+/http://www.hmrc.gov.uk/families/babsi.htm

This predates the system of interest being paid gross automatically.

The fact that the income is assessed on the parent does not prevent the child from being the absolute  beneficiary of both capital and income - that is, the child is the beneficial owner.

https://techzone.adviserzone.com/anon/public/iht-est-plan/Prac-guide-gifting-child-grand

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem4300

skipfeeney

xylophone said:

Sorry Xylophone - I am not understanding what is meant by The income arising on a parental settlement?

A "parental settlement" arises where a parent gifts money or assets to his minor unmarried child.

Income on such gifts is subject to the £100 rule.

See https://webarchive.nationalarchives.gov.uk/+/http://www.hmrc.gov.uk/families/babsi.htm

This predates the system of interest being paid gross automatically.

The fact that the income is assessed on the parent does not prevent the child from being the absolute  beneficiary of both capital and income - that is, the child is the beneficial owner.

https://techzone.adviserzone.com/anon/public/iht-est-plan/Prac-guide-gifting-child-grand

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem4300

Thanks for that.  I wasn't aware of that all.  I guess in my case the income would be the dividend from the SMT shares.  At the moment it is not very much at all, but this could all change in 10 years.  Do you know if capital gains would need to paid on these types of accounts and would the capital gains be in the childs name?

I think I may look to see if i can transfer this now to a JISA.

underground99

skipfeeney said:
Thanks for that.  I wasn't aware of that all.  I guess in my case the income would be the dividend from the SMT shares.  At the moment it is not very much at all, but this could all change in 10 years.  Do you know if capital gains would need to paid on these types of accounts and would the capital gains be in the childs name?

I think I may look to see if i can transfer this now to a JISA.

The 'settlor' who settles money into trust (e.g. a bare trust in this case, but would apply equally to a child bank account with parent as trustee) is the person who put the money into it. In this case the child has cash or other investment assets, but it was funded by the parent, so it's a 'parental settlement'

Basically the rule is that if there's money in a taxable investment or savings account in the child's name which generates a small amount of income from time to time, that's fine, the tax man will treat it as the child's... but... if the annual amount of investment income (interest or dividends) where the account was funded by a parent is over £100, it would be taxed as if it was the income of the parent who funded it, and would use up the parent's own income allowances instead (or be taxed at the parent's own marginal rates for the dividend or interest income if their allowances were already used up). It's to stop families putting all their investments in their kids' names to dodge income tax.  But the rule only applies to income and isn't relevant for capital gains. All capital gains are simply treated as belonging to the beneficial owner of the assets which were sold, and don't get tied back to the original parent who financed the account. 

So if there's a disposal of assets which realises a capital gain greater than the child's annual CGT exemption, they could be taxed, but you could presumably manage the timing of disposals to avoid that - unless you start having some really serious values in there.  The £100 rule also doesn't apply to JISAs of course, as ISA income isn't taxable on anyone.

With a few thousand invested in SMT in a parent-funded bare trust, there is not going to be a lot of interest or dividend - they only pay a few pence of dividend per share per year. And the £100 threshold is per parent who funded it, so if for example each child's account had been funded by the parents jointly, the children could each make £200 of dividends per year before the amounts were significant enough for HMRC to want to link it to the parent.    So it's a rule that's worth being aware of, but may not have a practical effect if you are only putting a few hundred a year total into the account and it is not an investment that's aiming to pay a high dividend yield (preferring instead to invest in companies with high growth potential rather than big dividend payers).

A few observations
- you're currently paying in £30 per month to the accounts - that makes it pretty inefficient to be spending 5% of that every time for the £1.50 'regular investing fees'. If you decide to keep using accounts in the childrens own names going forward (whether JISA or bare trust), you could consider just topping up the accounts once a year. 

- If you're going to keep adding ~£1k a year between your 3 kids and have enough spare ISA allowance going forward to manage those future contributions within your own ISA allowance (or the ISA allowance of the other parent) that seems a pretty efficient way to deal with it (even if there would be no tax anyway, it at least saves recordkeeping to prove there's no tax to pay) and would give you more control over when the kids eventually get the money gifted to them.

- If you would be in your late 50s by the time the kids are old enough to be given the money for higher education or housebuying or marriage or travel etc, you could consider doing that £1k a year of investment inside your pension rather than an ISA. You can buy something like SMT in a pension just like you can buy it in an ISA, and the tax relief may make it even more efficient to do it that way. Depending on personal circumstances nearer the time, you may not need to literally 'raid' the pension account when the child needs the money because you may just be able to give them the cash out of your other employment income, or other savings or investment at the time, and just keep the money in your pension for retirement.

Steve182

I don't understand the point of parents investing in JISA's or similar unless -

Parents don't have any spare ISA allowance of their own
Parents expect to die before they want their children to have the money and the estate will be subject to IHT

I invest for my son in my ISA. I don't want him to have access to £££ to buy a motorbike at 18 when I want the money used for university or house deposit.

skipfeeney

underground99 said:

skipfeeney said:
Thanks for that.  I wasn't aware of that all.  I guess in my case the income would be the dividend from the SMT shares.  At the moment it is not very much at all, but this could all change in 10 years.  Do you know if capital gains would need to paid on these types of accounts and would the capital gains be in the childs name?

I think I may look to see if i can transfer this now to a JISA.

The 'settlor' who settles money into trust (e.g. a bare trust in this case, but would apply equally to a child bank account with parent as trustee) is the person who put the money into it. In this case the child has cash or other investment assets, but it was funded by the parent, so it's a 'parental settlement'

Basically the rule is that if there's money in a taxable investment or savings account in the child's name which generates a small amount of income from time to time, that's fine, the tax man will treat it as the child's... but... if the annual amount of investment income (interest or dividends) where the account was funded by a parent is over £100, it would be taxed as if it was the income of the parent who funded it, and would use up the parent's own income allowances instead (or be taxed at the parent's own marginal rates for the dividend or interest income if their allowances were already used up). It's to stop families putting all their investments in their kids' names to dodge income tax.  But the rule only applies to income and isn't relevant for capital gains. All capital gains are simply treated as belonging to the beneficial owner of the assets which were sold, and don't get tied back to the original parent who financed the account. 

So if there's a disposal of assets which realises a capital gain greater than the child's annual CGT exemption, they could be taxed, but you could presumably manage the timing of disposals to avoid that - unless you start having some really serious values in there.  The £100 rule also doesn't apply to JISAs of course, as ISA income isn't taxable on anyone.

With a few thousand invested in SMT in a parent-funded bare trust, there is not going to be a lot of interest or dividend - they only pay a few pence of dividend per share per year. And the £100 threshold is per parent who funded it, so if for example each child's account had been funded by the parents jointly, the children could each make £200 of dividends per year before the amounts were significant enough for HMRC to want to link it to the parent.    So it's a rule that's worth being aware of, but may not have a practical effect if you are only putting a few hundred a year total into the account and it is not an investment that's aiming to pay a high dividend yield (preferring instead to invest in companies with high growth potential rather than big dividend payers).

A few observations
- you're currently paying in £30 per month to the accounts - that makes it pretty inefficient to be spending 5% of that every time for the £1.50 'regular investing fees'. If you decide to keep using accounts in the childrens own names going forward (whether JISA or bare trust), you could consider just topping up the accounts once a year. 

- If you're going to keep adding ~£1k a year between your 3 kids and have enough spare ISA allowance going forward to manage those future contributions within your own ISA allowance (or the ISA allowance of the other parent) that seems a pretty efficient way to deal with it (even if there would be no tax anyway, it at least saves recordkeeping to prove there's no tax to pay) and would give you more control over when the kids eventually get the money gifted to them.

- If you would be in your late 50s by the time the kids are old enough to be given the money for higher education or housebuying or marriage or travel etc, you could consider doing that £1k a year of investment inside your pension rather than an ISA. You can buy something like SMT in a pension just like you can buy it in an ISA, and the tax relief may make it even more efficient to do it that way. Depending on personal circumstances nearer the time, you may not need to literally 'raid' the pension account when the child needs the money because you may just be able to give them the cash out of your other employment income, or other savings or investment at the time, and just keep the money in your pension for retirement.

Thanks for taking the time to explain it - really appreciate it.  It is pretty confusing! 

To answer some of your questions..I am not paying £1.50 yet.  As part of the transfer deal from Baille Gifford to HL the regular investment fee is waived for 3 years.  I am aware that i will need to start paying it at some point in the near future though.  I think your idea will work well when that happens - just invest once a year

 With a third child recently being born it has made me review the existing investments and how they are configured, I will have a good think of the best way forward.

skipfeeney

Steve182 said:

I don't understand the point of parents investing in JISA's or similar unless -

Parents don't have any spare ISA allowance of their own
Parents expect to die before they want their children to have the money and the estate will be subject to IHT

I invest for my son in my ISA. I don't want him to have access to £££ to buy a motorbike at 18 when I want the money used for university or house deposit.

I know what you mean.  In hindsight it might have been a better option for me.  However at the time I wanted to keep the kids investment separate from my own. What i am actually doing is investing the child benefit in these accounts every month, so it made sense to separate it at the time.

jimjames

skipfeeney said:

Steve182 said:

I don't understand the point of parents investing in JISA's or similar unless -

Parents don't have any spare ISA allowance of their own
Parents expect to die before they want their children to have the money and the estate will be subject to IHT

I invest for my son in my ISA. I don't want him to have access to £££ to buy a motorbike at 18 when I want the money used for university or house deposit.

I know what you mean.  In hindsight it might have been a better option for me.  However at the time I wanted to keep the kids investment separate from my own. What i am actually doing is investing the child benefit in these accounts every month, so it made sense to separate it at the time.

But there is no reason to continue doing that with future payments. It does mean money in 2 places but it will be more efficient charges wise to pay elsewhere.

jimjames

Steve182 said:

I don't understand the point of parents investing in JISA's or similar unless -

Parents don't have any spare ISA allowance of their own
Parents expect to die before they want their children to have the money and the estate will be subject to IHT

I invest for my son in my ISA. I don't want him to have access to £££ to buy a motorbike at 18 when I want the money used for university or house deposit.

On the other hand it means there are assets in the parent's name which will affect their eligibility for certain benefits which could have been an issue over the last 12 months for example when those savings would need to have been spent whereas in a child's name they wouldn't be counted.

Keep_pedalling

Steve182 said:

I don't understand the point of parents investing in JISA's or similar unless -

Parents don't have any spare ISA allowance of their own
Parents expect to die before they want their children to have the money and the estate will be subject to IHT

I invest for my son in my ISA. I don't want him to have access to £££ to buy a motorbike at 18 when I want the money used for university or house deposit.

There are two reasons young people buy motor bikes. The first is that they are motorbike enthusiasts, the second, and more likely, is they can’t afford to buy a car. 

Steve182

Keep_pedalling said:

Steve182 said:

I don't understand the point of parents investing in JISA's or similar unless -

Parents don't have any spare ISA allowance of their own
Parents expect to die before they want their children to have the money and the estate will be subject to IHT

I invest for my son in my ISA. I don't want him to have access to £££ to buy a motorbike at 18 when I want the money used for university or house deposit.

There are two reasons young people buy motor bikes. The first is that they are motorbike enthusiasts, the second, and more likely, is they can’t afford to buy a car. 

That may well be true. I used motorbike just as an example of young people spending money on things that may not be in their best interest when you were saving for them with something else in mind.