Tax efficient savings for your children

  • by Carole Jordan
  • 08 Aug, 2016

When you have children and grandchildren there always seems to be something that needs to be paid out for! Whether setting them up for university, buying their first house, or even their wedding day. 
It’s a good idea to save small amounts over time for those big occasions that creep up on you. There are lots of options available now, with some new, so here’s a summary, to start you thinking about what might suit you and your child best.

The £100 rule

All children’s savings accounts follow the normal tax allowance guidelines, so for the year 2016/17 your child, like most of us, has an income tax free allowance of £11,000. But, the £100 Rule states that any income exceeding £100, resulting from an asset given by a parent to a child, will be taxed at the parent’s normal tax rate. This is true for most children’s savings accounts, with the exception of a JISA which remains tax free.

The good news is that income generated from assets from grandparents are tax free, so wherever possible, this is the best way to hand money down the generations.

Types of child savings accounts

Junior ISA (JISA)
  • JISAs replaced the Child Trust Fund (CTF).
  • For the current tax year 16/17 there is a savings limit of £4,080 per year. This is per child rather than per parent.
  • Your child must be under 18 and live in the UK in order to have one.
  • They are entirely tax free!
  • Once your child turns 18 they gain full access to their money, but not before.
  • Can be held in cash, stocks and shares, or even a combination of the two.

Regular Savings Account

  • Interest rates may be more competitive than a JISA.
  • Your child can have access to the money before they turn 18.
  • Grandparents, relatives and friends can contribute to the savings and the child can earn up to £17,000 in interest before any tax is paid!

Child SIPPs

  • Allow you, the parent to pay towards your child’s retirement! Especially attractive if you are the kind of person who really enjoys planning for the future.
  • They offer you a 20% tax relief.
  • Up to £3,600 can be invested this way
  • Investments are likely to be in unit trusts giving a higher rate of return over the long term.
  • However, they can currently only be accessed at the age of 55, and this age is set to rise. We can’t predict what it will be by the time your child is ready to retire!
 You can hold assets in a trust so that you can control when your child has access to the funds, either on an income or capital basis.

  • Bare Trusts: Meaning your child has full access to the saved assets when they turn 18. Plus they’re free to set up!
  • Discretionary Trusts: Meaning a Trustee is elected who will control how much and when your child will be allowed to access any of their assets.
  • In both cases a trustee is needed to manage the assets to be saved for your children, there can be more than one person.
Cash or stocks & shares ?

Upon choosing a savings account for your child you will have to decide if you want to save in cash or stocks and shares. A lot of people choose to invest in cash as it is the “safest” option, however, due to low interest rates you could technically be losing money every year. Although stocks and shares is considered the more dangerous route it does provide you with the opportunity to grow your money faster! A wise strategy is to invest in each to spread your risk.

Take advice on your options

If you want to maximise the return on investments for your child or have a substantial amount to invest then it is important to take advice. Our clients get access to a free consultation with a friendly independent financial advisor as the starting point for their decisions.

Contact me if you are a business owner looking for an accountant that provides services which support your business and your personal goals.  In a complimentary 45 minute meeting we can establish your priorities and explain how BusinessHeads can help.

All details above were correct at the time of publishing - for more up to date information please get in touch .

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