Investment Trust for Children

Video explores the use of investment trusts and unit trusts whan saving for children to over and above Junior ISA allowance.  Designate or Bare Trust which is best for you?

Transcript:

“Hello there, continuing with my series of investment and savings for children.  This video is to do with investment trusts and unit trusts and things like that, so collective stock and shares based investing.

So first things first, if you are planning on savings or investments for children then there are lots of different types of investments, [that] the most common one will be people using child trust funds and more recently people using junior ISAs, which grow inside a tax privileged environment for your child.  So that’s all well and good: the junior ISA allowance, at the time of shooting this video, the maximum you can pay in is £4,000 per annum.  Nice, tax-free but what if you've used that allowance up? 

In this series of videos I’ve talked about the possibility to invest in pensions and it may be that that works the tax relief but you go: “well, they can’t get hold of them until they are aged 55” or something like that.  So you want to do something, you want to be tax efficient, you want investments for your children or grandchildren but you’re not keen on pensions and the ISA allowance is already being used up, so consider investment trusts and unit trusts and things like that.

Now what I need to explain here is: every child in this country they are separate legal entities, they have their own identity but they also have their own tax allowance.  They have their own personal allowance. Currently the personal allowance for most adults is £10,000 per annum, so £10,000 per annum of income is what you can earn before you get taxed.  That's the same for a child. So you may wish to consider using let's say an investment trust and you invest money in an investment trust for your child or grandchild.

Now there are two ways that you can set up how that investment trust is owned:

1. Route 1 is called a ‘designated account’, so it's in the name of me, me the adult, but designated for my child or grandchild “Joe Bloggs”.  Okay? so in your name but designated for them.  What that does is that gives you control and ownership technically of the investment trust but if it generates too much income then it will be taxed as if you own it.  So that’s designated, that the way to own it is a designated account.
2. The second way to own it is something called a ‘bare trust’.  A bare trust is, quite literally, it's an absolute trust.  It means that, that money is absolutely, unequivocally, set aside for your child or grandchild.  Because they technically own it, you've lost ownership you don't own that money, you don't own those investments.  Technically, it is the child that owns it, whilst it's in trust until they’re aged 18, they own it.  So it would be taxed as if they own it.  Now if they have a full personal allowance, a tax personal allowance of £10,000 per annum, their bare trust can pretty much, from an income tax perspective, grow virtually tax-free. [And] then on top of that you know we have capital gains tax allowances and things like that.

So they are commonly available: investing for children via investment trusts and unit trusts.  If it's a designated account, really indirectly, it's taxed as if it was yours, so we have to be careful and not go for income producing assets, we want growth, growth investments growth assets but you have control and you don't necessarily have to sign all or some of that benefit over at aged 18 but clearly you got the choice to do so when your child or grandchild reaches adulthood.

The other way to deal with it is a bare trust where you do lose control. You can make the fund choices and things like that but, it's your child or grandchild that legally owns it, within a trust, and it is then taxed as if it was their income etc.  But because they have a yearly tax allowance, a personal allowance of £10,000, it may prove just as tax efficient as if you had a junior ISA or if you're just using it to top up and supplement junior ISA allowances.  So there's another idea for investing for children using investment trusts or unit trusts or other types of collective investment like that, but consider either the ‘designated account’ route or the ‘bare trust’ route.

As ever, any questions or if you need professional advice please do contact me. Thanks very much for watching.”