Ways to hold grandchild investments?
|Kids | Investing for Children
Asked by hpanting, submitted
02 December 2011.
Hi, we are looking to invest an equal sum of money for each of our five grand children aged from one year to fifteen, allowing them acess at the age of eighteen.
I would prefer not to have in mine of my wife's name, we have heard of bare trusts but was wondering if you could surgest any other way, which hopfully will increase over the years, in particular for the more younger one's.
I have heard we are also allowed to give away three thousand pounds each tax year, without any tax inplication, and can use last years allowance as well, is this factual please. we await your reply/advice.
Answered by Justin on 14 August 2012
There are two man points to cover here: the tax implications of gifting money to grandchildren and how to hold investments for them.
Neither grandparent nor grandchild are liable to tax on gifts made from one to the other. Although the grandchildren will have to pay tax on any subsequent income or gains from investing the gift if these exceed their annual personal tax allowances (which are the same as an adult's).
The tax implication for grandparents making gifts relates to inheritance tax. Provided you live for at least seven years after making a gift it's deemed to fall outside of your estate, hence free from potential inheritance tax. The £3,000 annual gift allowance you refer to means total gifts up to this amount fall outside of your estate immediately. And yes, you can carry forward the previous year's allowance if unused. You can also make an unlimited number of gifts of up to £250 per person. Obviously, the above is only relevant if inheritance tax is a concern for you.
Because investment's can't be directly owned by a child until they're 18 (16 in Scotland), the assets must be held by someone else or in trust for the child's benefit until then.
You can hold investments in your name designated for the grandchild, but they remain yours (hence you're liable for tax) until the child reaches 18, so will only be treated as a gift for inheritance tax purposes at that time too.
Placing the investments in a bare trust means they're taxable as the grandchild's and count as a gift, although the child can't take ownership until they're 18.
However, for something that should be straightforward, bare trusts cause an immense amount of confusion with little definitive guidance on what you actually need to do to set one up. Some fund managers provide a form and some don't. And HMRC doesn't require notification via the usual 41G trust form (thanks to reader 'ivanopinion' for pointing this out to me), but does state you need to write to them with details. In practice I doubt many people are doing this correctly and I also doubt HMRC cares that much - this is hardly the preferred route for big tax evaders.
And, to confuse matters further, I suppose you could put a designated investment in a bare trust.
I'll try and write a more comprehensive article on this in future, including a template bare trust form, but for now if your chosen investment provider doesn't offer a bare trust form then I'd be inclined to write your own using this Abbey form as a guide (it may be an old form, but the wording is valid).
Another, potentially simpler, option would be to use Junior ISAs. These avoid the hassle of trusts, are not taxable and can't be accessed by the child until age 18. The annual contribution limit is currently £3,600 per child, which may be split between cash and investments. However, there's a slight complication if any of your grandchildren already have a child trust fund (CTF), as this means they can't open a Junior ISA. CTFs will likely be merged into Junior ISAs at some point, meanwhile existing CTFs may also be topped up by up to £3,600 a year.
Hope my answer gives you some helpful pointers.