With the Child Trust Fund no longer available to babies born since the start of the year – even children haven’t avoided the Age of Austerity – parents looking to save for their children don’t have many options at the moment. A “Junior ISA” has been promised, but isn’t expected until later in 2011. Yet the Child Trust Fund had its limitations and the Junior ISA is expected to look like a Child Trust Fund but without the Government’s contributions. Here are a few tips about saving for children, with some of the potential pitfalls to avoid.
The first question to ask is: how much am I looking to contribute? The Child Trust Fund was capped at £1,200 per year (or £100 a month). It may not sound huge, but over 18 years that could end up being worth over £27,000 in today’s money (assuming growth of 3% over inflation and 1.5% of annual costs). That’s a relatively sizeable sum for an 18 year old. If you want to contribute more, either for the child’s own benefit or for more substantial commitments such as school and university fees, then other steps clearly need to be taken.
The second question to ask is: what are you actually saving for? I suspect most parents might hesitate at the thought of their child turning 18 and discovering a large pot of money that they can spend on whatever they want. It would undoubtedly be better, therefore, if the parents could retain some discretion as to what it is spent on. For example, it could go towards school or university fees, a school trip or even a gap year.
If you wish to save more than the CTF or Junior ISA allows, some caution is advised. While children get their own tax allowances for income tax and CGT, any income in excess of £100 per year that comes from an investment that a parent has given to a child is deemed to be income of the parent – hence subject to the parent’s rate of income tax.
However, this threshold can be doubled if there are two parents and it does not apply at all to gifts from anyone else, including grandparents.
Importantly, capital gains are not subject to the same constraint. Careful CGT planning should help mitigate any tax. CGT is only payable in the year a gain is crystallised, and the first £10,100 of any gain is exempt from CGT. Hence, it should be relatively easy to ensure that the child never crystallises a gain in excess of this threshold in any given tax year.
Furthermore, it should be advantageous to write the investments under a trust with the child named as beneficiary. That means that there is a clean separation of ownership from the parents, but at the same time giving the parents (in their capacity as trustees) the ability to manage the assets for the benefit of the child. That could include paying for school and university fees, a school trip or a gap year.
However, it should be pointed out that special provisions are likely to be necessary if you intend to send your children to independent school. With some schools now costing up to £10,000 a term, school fee planning is a separate topic in its own right. Sending a child to a top independent school for their entire school career is likely to cost over £600,000 per child (assuming fee inflation of 5% pa). To afford this, a lump sum of £270,000 could be made at birth (assuming 7% investment growth) or alternatively a monthly savings plan could be put in place starting at £2,500 a month. Both are clearly considerable commitments.