How to Save Money for Your Children or Grandchildren

We all want our children or grandchildren to have the best start in life. We also want them to have the best start to adulthood they possibly can. For some this means making sure there is a fund available to help with university fees, a deposit on a house, driving lessons or a first car.

Todays blog is not an exhaustive list but looks at some of the most commonly used options for saving and investing money for your children or grandchildren. These options will have different features in terms of tax, savings limits, accessibility and control. It is important therefore, that when deciding on which option is right for you that you seek advice form a professional financial adviser, such as the advisers at Howard Wright, to make sure any investments set up are correct for you, your objectives and your circumstances.

None Trust Options

Collective Investment Account (also known as Unit Trust)

• The collective investment account would be held in the name of the person or people that have set it up and they will be the owner of the policy. This means that if you set this up, the money accumulated will remain in your name until you decide to gift this to children or grandchildren.
• Any growth within the Collective Investment Account will be subject to capital gains tax in the name of who ever holds the contract. However, an individual has an allowance of £6,000 per annum before any tax is liable. If the money is held in joint names each person would be able to utilise the allowance meaning a gain of £12,000 could be made each year before any tax is liable for couple.
• Because the money will remain in the name of the person that set it up, you would retain full access and full control. You can decide when to gift the money and how much you want to gift. This will allow you access the fund before 18 should you wish to pay for things such as school fees, which is not possible within a junior ISA. It will also allow you as the owner to control the fund post 18 so that the money is used wisely and as intended.
• As the fund will remain in your name, it will grow in your name also. When you do decide to gift it, the value of the gift made will be classed as a gift for IHT. Should you pass away within 7 years of the gift and your estate is above the nil rate band, there may be an inheritance tax liability.
• Unlike a Junior ISA where the money belongs to the child, the money in the unit trust is in your name. Therefore should you have further children or grandchildren you can choose to share the money between them if you wanted to do so rather than have to set up another plan.
• On death the money in the Collective would fall into your estate and your Will would need to clearly state what you would like to happen to the money.

Junior ISA

• As with normal ISA’s there are two types of junior ISA a cash ISA and an Investment ISA. Howard Wright only offer investment Junior ISA’s.
• A parent must set up the junior ISA however one this is in place you will be able to contribute to the Junior ISA.
• • The annual gift allowance on an Inheritance Tax free basis is £3,000 per donor (with one year’s allowance carried forward). Inheritance Tax could be charged on anything over this limit if you pass away within 7 years of making the gift and have an estate in excess of the inheritance tax allowance at the time.
• The limit on investment from all sources is £9,000 for the current tax year per child.
• Any growth will be free of income or capital gains tax.
• Once the money has been invested into the Junior ISA the money will belong to the child and as such you will have no access to the fund.
• Once the child turns 18 the Junior ISA will automatically become an adult ISA at which point they will have full control and access to the money, meaning they can withdraw part or all of the money should they choose to do so.
• There will be no access for the children prior to 18.

Trust Options

Bare Trust

• Bare trusts, also known as absolute trusts or fixed interest trusts are the simplest form of trust.
• The settlor makes a gift into trust which is held for the benefit of a specified beneficiary.
• Where the trust is for more than one beneficiary each person’s share of the trust fund should be specified.
• The gift is classed as a potentially exempt transfer for inheritance tax (IHT) purposes. As long as the settlor survives for 7 years from the date of the gift it falls outside of their estate.
• The fund falls into the estates of the beneficiaries from the date of the initial gift.
• With a bare trust, the trustees are looking after the trust property for the known beneficiaries. The beneficiaries become absolutely entitled to the trust property at age 18, but have no access prior to this age.
• Once the gift is made the beneficiaries can’t be changed and money can’t be withheld from them beyond the age of 18. This aspect makes them unattractive to many clients as they prefer to retain a greater degree of control.

Discretionary Trust

• With a discretionary trust, the settlor makes a gift into trust and the trustees hold the trust fund for a wide class of potential beneficiaries- such as “all my children”.
• These trusts give the trustees absolute discretion over who benefits and when. This gives the trustees a high degree of control over the funds.
• The settlor is often also a trustee to help ensure their wishes are acted upon during their lifetime.
• In addition, the settlor can provide the trustees with a letter of wishes identifying to whom and when they’d like any benefits to be paid. The letter is not legally binding, but will give the trustees clear guidance.
• This degree of control is attractive to many. Family disputes are not uncommon and many feel they’d prefer to pass funds down the generations when the beneficiaries are slightly older than 18.
• A discretionary trust also provides greater protection from third parties, for example in the event of divorce or bankruptcy, as there is no defined benefit for any of the beneficiaries.

Simplicity Versus Control

Essentially the two types of trust offer a trade-off between the simplicity of the trust and the control it offers the settlor.

For most, the control is the more attractive aspect, especially where gifts can stay within the client’s available nil-rate band. Keeping gifts within the nil-rate band and using non-income producing assets such as life assurance investment bonds can provide clients with the best of both, allowing them to create a trust with maximum control, no initial IHT charge and limited ongoing administrative or tax burdens.