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You are here: Saving for Children Guide

Saving for Children Guide


How to invest for a child and the tax implications

The following comments are only meant as a guide and are based on our understanding of HM Revenue & Customs practices as at 31 August 2008, which could change at any time. If you are unsure how tax will affect your investment, you should seek professional advice.

Children under the age of 18 (16 in Scotland) cannot hold shares in their own name. There are two ways to get round this limitation.

Designated account

By using a designated account, you can hold the investment in your own name but ‘designate’ it in the child’s name. One of the major advantages of the designated account is that the investment remains in your control for as long as you wish.

If you choose this option, the investment will be considered to belong to you, the adult, for tax purposes. Therefore, income earned by the investment and any capital gains generated will be taxed at your highest rate and the investment will be subject to inheritance tax as part of your estate if you die while you still hold the investment in your name.

Bare trust

If you want the money you give to belong to the child straightaway, then you can set up a bare trust to hold the investment while they are still too young to hold shares in their own name. When the child reaches 18 in England and Wales (or 16 in Scotland) they can gain control of the investments.

In this case, the investment is treated as the child’s for income and capital gains tax purposes. This is particularly useful if you are likely to be making full use of your own capital gains tax allowance or if you are a higher-rate taxpayer. By using a bare trust, the investment is also treated as a potentially-exempt transfer for inheritance tax purposes. This means that as long as you live for at least seven years after you make the investment on behalf of the child, it will not be liable to inheritance tax when you die.

For more information on tax, see the website of the UK Government: Money, Tax & Benefits section.

Children’s investment plans offered by investment managers usually offer the choice of using a designated account or a bare trust when investing for a child.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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