How to give the kids a helping hand Print E-mail
Written by Jonquil Lowe, 2006   

A great part of being a grandparent is spoiling your grandchildren. But spoiling is one thing – setting them out on the road to a financially secure future is something else.

Among the most useful gifts you can make are money or investments that build up to be used later on, say, to pay for driving lessons, or to help with the costs of further education. And there are lots of investments to choose from.

Childhood Trust Fund

Every child born from 1 September 2002 has a Child Trust Fund. This is a government scheme to encourage the savings habit and ensure young adults in future have some money to help them take advantage of life opportunities. The Government pays an initial £250 into the Child Trust Fund (£500 for children in low-income households) and will add the same again when the child reaches seven. The government is consulting on a further top-up at secondary school age.

In addition, family and friends can collectively pay up to £1,200 a year into the Fund. You can make your gifts either by giving cash or a cheque to the parent to pay in or by getting the account details and paying in direct.

The parent generally chooses how the Fund is invested:
  • Cash-based: a savings account where interest builds up tax-free;
  • Share-based: an investment fund where the return is linked to the stock market and can go up and down. Part of the income is taxed but the rest of the return builds up tax-free;
  • Stakeholder: share-based for the first 13 years switching to cash-based during the last five years in order to lock in earlier gains.

When investing over such a long period, the share-based or stakeholder option will usually be the most suitable. Figure 1 shows how much a stakeholder Child Trust Fund could be worth by age 18.

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Figure 1. How much a Child Trust Fund could be worth by age 18 (in today's money).


Other tax-efficient investments Children’s bonus bonds from National Savings & Investments (NS&I) provide tax-free interest at a rate fixed for five years at a time.

You can buy them for any of your grandchildren under 16 in multiples of £25. The bonds can run until age 21 but may be cashed in earlier, subject to some loss of interest. The maximum holding is currently £3,000 per issue per child.

As a bit of fun you might give your grandchild premium bonds. These earn no interest but take part in monthly prize draws. The chance of winning any prize (minimum £50) stood at 1 in 24,000 in May 2006 and around 1 in 15 billion for winning one of the two £1 million jackpots. The minimum purchase is £100. Children aged 16 and over can have their own cash individual savings account (ISA). These are savings accounts that pay interest tax-free.

For a stock-market-linked investment, you could consider a friendly society tax-exempt savings plan (sometimes called a “baby bond”). These are taxed in the same way as share-based Child Trust Funds (see above). The maximum investment is just £270 a year or £25 a month per child and charges are often fairly high relative to the small scale of the investment. Plans normally run for between ten and 25 years.

Friendly societies and insurance companies offer other savings plans that are not tax-exempt. These are usually not a good choice for children because the provider has had to pay tax on the return from the underlying investments and this can’t be reclaimed by the child.

If you are thinking really long-term, anyone under age 75 – even a child – can have a pension scheme, so you could pay up to £2,808 a year per child and the government adds a bonus of up to £792. The child will not be able to touch the money until age 55 and must then draw most of it as pension.

Other options

Parents making gifts can end up being taxed themselves on their child’s income, but this is not a problem for grandparents. And, since children have exactly the same tax-free allowances as adults, most will not pay tax on the return from otherwise taxable investments.

For example, your gifts could be paid into a normal bank or building society savings account. Parents can register non-taxpaying children to receive the interest without any tax deducted by completing form R85 from the account provider. This could be a particularly suitable gift if you want your grandchild to learn about managing day-to-day money.

For the long-term, unit trusts or investment trusts could be a good choice – these are investment funds linked to the stock market. Most income is received with tax at 10 per cent already deducted, which can’t be reclaimed, but there would be no further tax for a non-taxpaying child on either the income or capital growth. You could hold the units in your own name but designated as being for the child. The child is then the owner for tax purposes and can take possession of the investment from age 18.

Using trusts

A trust is a legal arrangement where one or more people (the trustees) hold investments or other assets not for themselves but for other people (the beneficiaries). A trust can have a class of beneficiaries, such as all your grandchildren (including any not yet born). You can specify restrictions – for example, that money should be released only as the trustees decide or not until age 25. And you can give the trust freedom to hold virtually any types of investments.

However, a change in the tax rules announced in the 2006 Budget means that most gifts to trusts could now trigger inheritance tax charges at the time of the gift, at ten-yearly intervals while the trust is running and when assets are paid out. Whether tax will be payable depends on other gifts you have made in recent years.

This is a complex area so do get advice from a solicitor or trust expert. This is likely to cost anything from, say, £800 upwards, so trusts are suitable only if you are making a sizeable gift.Trusts you had already set up for children before 22 March 2006 may also be caught by the Budget changes – to find out, contact whoever set up or manages the trust for you.

Jonquil Lowe is a freelance financial researcher and journalist, and author of The Which? Guide to Giving and Inheriting published by Which? Books.

Useful contacts

For information about the Child Trust Fund:
CTF Helpline: 0845 302 1470
www.childtrustfund.gov.uk

For NS&I investments:
Tel: 0845 964 5000
www.nsandi.com

To find specialist help with trusts:
Society of Trust and Estate Practitioners (STEP)
Tel: 020 7838 4885
www.step.org
 
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