Posted by Fred Lake

Best Tax-Free Investments For Children

Best Tax-Free Investments For Children

As costs generally is rising; with basic costs of education, housing, and clothing unwaveringly marching upwards, saving for children has now become the most important thing to do. It is worthwhile to note that small amounts can really add up to something massive if you save regularly from the child’s birth. According to accountants, a saving of as low as £10 a month at an estimated interest rate of 3 per cent could give a child nearly £3,000 by the time he or she is 18 years of age, while saving £300 a month could produce a whopping £85,800. Won’t this be a cushion?

Oftentimes, most parents decide to save in their child’s name rather than their own for tax purposes. Because by saving in the child’s name, the interest earned is generally tax-free (up to certain limits) as children get the same tax-free allowance as adults.

So, whether you are saving into a Junior ISA (JISA), NS&I Premium Bonds or an ordinary savings account, your child’s interest will remain tax-free up to the HMRC personal allowance limit as set by the tax bodies. 

What tax free investments are there for the children?

The following is a list of popular savings and investment products for children.

Junior ISA (JISA)

Junior Individual Savings Accounts replaced the Child Trust Fund upon launch in November 2011, and children not eligible for a Child Trust Fund then can have a JISA. JISA has an annual savings limit of £4,260 in the 2018/19 tax year, which can be either held entirely in cash, stocks and shares or any mixture of the two. Though the parent or legal guardian must set the JISA up, anyone can pay into it. Withdrawal cannot be made until the child turns 18. As an added bonus, JISA can be held simultaneously with an adult ISA between the ages of 16 and 18, giving the child a boosted tax-free allowance for two years. However, only two JISA may be held per child at once – one cash, one stocks and shares. This differs from adult ISAs, where only one of each type can be opened per tax year.

Regular savings

Although children’s’ savings accounts offer interest comparable to JISAs, they allow instant access to the funds any time; even before the child turns 18 unlike JISA. Regular savings are useful in teaching children financial housekeeping as the child is granted access to his or her account at age seven and can transact with the account as they grow. However, regular saving accounts have lower savings limits than JISAs with many providers slashing interest rates if deposits exceed a certain amount.

Fixed-rate bonds

Fixed-rate bonds for children often offer higher and better rates of interest than regular accounts. Many also have a higher limit; allowing you to save more than a regular account or JISA does. This makes Fixed-rate bonds a viable option for those who wish to put more away for not too long a time. Fixed-rate bond period is between one and five years; making it serve as a middle ground between regular savings and JISAs for those who need the option to use the funds earlier.

Child SIPPs

Child SIPPs allow parents to pay into a pension account for their child from the moment he or she is born. As adult pensions, child SIPPs are eligible for 20 per cent tax relief. This means that parents only have to pay in £2,800 per year to receive £3,600 back. As earlier mentioned, SIPPs are incredibly attractive to people who really enjoys planning ahead and desires to help their child enjoy their twilight years. At an estimated interest rate of 5 per cent, 18 yearly payments of £2,800 would equal £1,053,405 by the time the child reaches 65. Like all pension plans however, they cannot be accessed until 55 at the least.

Trusts

A trust is said to be a legal arrangement between two or more persons where one or more ‘trustees’ are made legally responsible for holding assets for the ‘beneficiaries’ – in this case, your child or children. The assets – such as land, buildings, shares, money, or even antiques – are placed in trust for the beneficiaries and the trustees are responsible for managing the trust. There are however two types of trusts: bare trusts; which give the children an absolute and unrestricted right to access their money at age 18, and discretionary trusts; which grant trustees the freedom to decide when and how much to pay out. 

Child Trust Funds (CTF)

The CTF was launched in 2005 to encourage parents to save for their children mostly from birth. The UK government offered to pay £500 incentive into the account; £250 when the child was born and £250 once the child is seven years old. Though the CTF has been replaced by the JISA and the government has stopped issuing vouchers since January 2011, existing accounts remain open and the savings limit has been raised from £1,200 to match with the JISA. Also, transfers from CTF to JISA were made possible in 2015 however estimation has it that one million of the six million CTF have been lost due to the fact that there are no available current contact details for the owner.

Building a financial legacy for one’s child(ren) is a great way to hand such a financial head start. Bookkeeping helps the child manages what has been handed over to him or her and accountants are there to help. Tax free investment is the financial legacy you owe your children; pay it!

Fred Lake
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