Investing for children – your options

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Learn about the different options for investing on behalf of children and what they mean for your own tax position

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16 August 2023 | 3 minute read

Investing on behalf of your children or grandchildren could have a transformative impact on their future – perhaps enabling them to graduate debt-free, get a foot onto the property ladder, or benefit from an additional income stream. 

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There are several options to choose from when you’re investing for children, including Junior ISAs, junior pensions, certain types of trust and, for older children, Lifetime ISAs. The solution that’s right for you will depend on your family’s unique needs and circumstances. We can help you find this solution. In the meantime, the following guide sets out the key features of the main options. 

Junior ISA 

What you need to know 

One of the simplest ways to invest on behalf of children or grandchildren is to pay into a Junior ISA. The Junior ISA must be opened by the child’s parent or legal guardian, but anyone can contribute, so long as the total contributions don’t exceed £9,000 per tax year.  

Investments inside a Junior ISA are free from income tax and capital gains tax (CGT). Once the child reaches age 18, the Junior ISA will convert to an adult ISA and the child can access the funds as they wish. 

What it means for your own tax position 

Contributions to a Junior ISA are treated as gifts for inheritance tax (IHT) purposes.

Regular gifts might be classed as ‘normal expenditure out of income’ and be exempt from IHT. To qualify, the payments must be regular, form part of your normal expenditure, be made out of your income, and not affect your normal standard of living. The rules around this exemption are strict and it’s important to seek advice. 

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A guide to investing for children

Everything you need to know about investing for your child or grandchild’s future.

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Junior pension

What you need to know 

If you’re thinking longer term, investing in a junior pension could give your child or grandchild’s retirement savings a significant boost. The child won’t be able to access the funds until they reach the minimum pension age. This is currently 55, but it will rise to 57 from 2028 and it is expected to increase again to 58 from 2034.  

Parents or grandparents can contribute to a junior pension – usually up to £2,880 per tax year. Contributions benefit from 20% income tax relief, which boosts that £2,880 to £3,600.  

What it means for your own tax position 

Contributions to a junior pension count as gifts for IHT purposes. However, the gift might fall within your annual gifting exemption of £3,000, or be exempt from IHT if made from regular surplus income. 

Bare trust 

What you need to know 

A bare trust is a useful option for those wishing to retain some control over how the funds are used. Investments inside the trust are held by the trustee (such as the parent or grandparent) for the benefit of the child (the beneficiary). The trustee controls access to the investments until the child reaches 18 (or 16 in Scotland), after which the child has a right to the assets.

Unlike a Junior ISA or pension, there is no limit on the amount of money that can be invested in a bare trust each year. 

What it means for your own tax position 

If money or investments are put into a bare trust by grandparents (or anyone else who isn’t the child’s parent) the contents are taxed as if they belong to the child, which may mean there is little or no tax to pay.  

If the contributions are made by the child’s parent, and the income from the gift exceeds £100 per year, the parent will have to pay tax on all the trust’s income until the child reaches 18 (16 in Scotland). 

Contributions to a bare trust are treated as gifts for IHT purposes, but may be exempt from IHT if the gift falls within your annual gifting exemption of £3,000 or is paid from regular surplus income.  

Discretionary trust 

What you need to know 

A discretionary trust offers the opportunity for greater flexibility and control. As donor, you can make a gift to the trust and make it clear how you would like the funds to be used. The trustees have complete discretion over how and when the funds are paid out, although they should take your wishes into consideration. 

Unlike a bare trust, there is no absolute entitlement to the funds at age 18. The trustees can decide to release the funds at a later stage, perhaps when they feel the beneficiaries are old enough to look after the investments themselves. 

What it means for your own tax position 

Discretionary trusts are more complex than bare trusts, especially when it comes to the way they are taxed.  

Gifts made to a discretionary trust are ‘chargeable lifetime transfers’ (CLTs). If the value of the gift, plus any other CLTs made in the previous seven years, is over your IHT nil-rate band, the excess will be taxed at 20%. 

If the trust receives income from the investments, the trustees will have to pay income tax. The first £1,000 of income is taxed at the ‘standard rate’ of 20% (8.75% on dividend income), while income above £1,000 is taxed at 45% (39.35% on dividend income). From April 2024, the standard rate will be abolished.  

The trustees may also have to pay CGT if they sell or transfer assets on behalf of the beneficiary. When trustees pay income to a beneficiary whose marginal rate of income tax is less than 45%, the beneficiary can reclaim tax so that the tax burden is no greater than if the trust assets were their own. 

Lifetime ISA 

What you need to know 

For those wishing to help older children onto the property ladder, another option to consider is a Lifetime ISA. A Lifetime ISA can only be opened by the account holder (i.e. your child / grandchild) who must be between 18 and 39 years old. The maximum contribution is £4,000 a year until age 50, and the government will add a 25% bonus, up to a maximum of £1,000 a year.  

The account holder can withdraw money from age 60 or to buy their first home, so long as the property is worth £450,000 or less. If withdrawals are made for any other reason, a 25% charge will apply.  

What it means for your own tax position 

Contributions will count as gifts for IHT purposes. However, the gift might fall within your annual gifting exemption of £3,000, or be exempt from IHT if made from regular surplus income. 

Next steps

Junior ISAs, junior pensions, Lifetime ISAs and trusts are all tax-efficient ways of investing for your child or grandchild’s future. Choosing between them isn’t easy, and that’s where getting some smart advice comes in. By understanding you and what you want to achieve, we can recommend an investment solution that’s right for you and your family.

Investment optionAge of accessContribution limitTax treatment
Junior ISA18£9,000 p.a. Growth and withdrawals are tax free 
Subscriptions are gifts for IHT purposes 
Junior pension Minimum pension age (currently 55 but due to rise to 57 in 2028 with further increases likely) £2,880 p.a. net / £3,600 p.a. gross Tax relief on contributions 
Subscriptions are gifts for IHT purposes
Bare trust 18 (16 in Scotland) No limit Contributions by grandparents are taxed as if they belong to the child 
If contributions are made by the parent, and the income exceeds £100 per year, the parent pays tax on all the trust’s income 
Subscriptions are gifts for IHT purposes 
Discretionary trustVariable and complex No limit Contributions are chargeable lifetime transfers and may attract IHT at 20% 
Trustees pay income tax at up to 45%, and may also have to pay CGT 
Beneficiaries may be able to claim back income tax (depending on tax status) 
Lifetime ISA60 or on purchase of first home £4,000 p.a. until age 50 (plus 25% government bonus) Growth and withdrawals are tax free 
Contributions are gifts for IHT purposes 

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The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

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