How should I invest for overseas grandchildren?
|Kids | Investing for Children
Asked by drpsnceps, submitted
11 November 2009.
Like many grandparents, I'd like to invest for my grandchildren. My situation is a little different though as my grandchildren are foreign nationals (French). I presume that if I set up a fund here then, on maturity, they would be subject to UK tax etc even though not UK citizens.
I'd like them to have access to the investment on reaching 18 and I understand that making an offshore trust with a lump sum would be suitable and tax efficient. However, if possible, I'd prefer a 'savings' type of product as opposed to a stocks and shares linked investment. How should I go about this - or what alternatives are there?
Answered by Justin on 11 November 2009
I should start off by stating that my knowledge of the French tax system is not great, so I’d urge you to seek some specialist professional advice in this area if you feel the need. However, I hope my answer below outlines the main issues you need to consider and will at least point you in the right direction.
Firstly, I’m assuming that you’re a UK tax resident and your grandchildren are French tax residents, all likely to stay that way for the foreseeable future. To this end, money held in your name is normally taxable in the UK and money held in their name normally taxable in France.
If money is held in their name in the UK then UK tax will normally be deducted. However, under the France-UK Double Taxation Treaty (1987), UK tax paid on savings and investments should usually be offset against French tax owed by your grandchildren. [Note: there’s a new France-UK tax treaty on the way which could help a little more, as French ‘Social Charges’, a type of tax, will start being covered by UK tax already paid].
However, it’s a bit more complex than this as in France tax is levied on families, not individuals (a so-called ‘parts’ system). So whereas most children in the UK avoid having to pay tax by using their annual personal allowance where applicable, their French counterparts must add their income into the family ‘pot’ for tax purposes. As for how much tax might be due in France, you’ll need to speak to the parents as it’ll obviously depend on the family’s overall position.
If the money is held in the grandchildren’s name somewhere else outside France the position will likely be unchanged. It’ll be taxable in France, taking account of any applicable double taxation treaties.
In years gone by a fair number of people probably didn’t bother declaring overseas savings and investment income in their country of tax residence, on the basis it was likely to go unnoticed. However, there’s been an EU wide clampdown on this in recent years, to the point that under the EU Savings Directive money held in savings accounts outside the holder’s country of residence (if EU) must be reported to the tax authorities, else a ‘withholding’ tax is deducted from interest. Similar schemes have also been implemented by Jersey, Guernsey, Gibraltar and the Isle of Man.
Sorry for all the background, but it’s quite fundamental in determining what you might do. I think the main options open to you include:
1. You save the money in your name in the UK with the intention of giving it to the grandchildren when they reach 18. This is simple and might be tax efficient if you or your spouse are non-taxpayers, or can use cash ISAs. However, the money remains in your estate and this route may be less attractive if you have to pay tax on it. When you gift the money to the grandchildren at age 18, they probably wouldn’t have to pay French tax on the gift itself as things stand at present.
2. You give the money to your grandchildren now to place in a French savings account. I believe there’s tax-free options open to them called 'Livret Premiere Epargne' (age 0-11) and 'Livret Jeune Parcours' (age 12-25), both have a €1,600 limit per child. This is a simple and potentially tax efficient route and could help to get the money out of your estate. Only real downside is that you lose control of the money, they could squander it before 18. Also probably taxable (via the French family tax) if tax-free accounts are not used.
3. Gift the money into some form of trust with the grandchildren being beneficiaries. This could help get the money out of your estate and prevent them having access to the money until age 18. However, it’s unlikely to save any income or capital gains tax. Depending on the type of trust, either the trust or grandchildren will end up having to pay tax on savings interest generated, especially in light of the EU clampdown mentioned earlier. You could also end up spending more in trust fees (and other potential trust taxes) than is worthwhile.
I’ve assumed the money is held in a savings account, as this seems to be your wish. If it’s instead held in investments, the scenario is largely unchanged, although returns could come from capital gains as well as/instead of income. This gives scope to use your capital gains tax allowance if you hold the money in your name in the UK. France also has an equivalent capital gains tax allowance, but it’s unlikely the grandchildren will be able to hold investments directly themselves (too young).
Lots of food for thought...If there’s a few thousand pounds or less involved, I’d be inclined to give the trust route a miss and opt for one of the simpler solutions. If a larger sum then a trust might make sense depending on your wider financial situation. But don’t expect to avoid tax and find a good trust specialist to set up something that is suitable for you.
To find out more about trusts, take a look at our Inheritance Tax page.