Investing for Children
Unlike saving, investing usually means taking some risk and potentially tying up money for 5-10 years or more. The reason for taking risks is to try and get a better return on the money compared to a savings account.
If you're planning to put money aside for your child from their early years until they turn 18, then you should at least consider investing and decide whether it's right for you and your child.
Savings have just one source of return, the interest received from your bank or building society.
Investments usually have two sources of return. The change in value ('capital value') of the investment itself, and any income paid to the owner.
Mr X buys a holiday home for £100,000 and rents it out for £250 per week. A year later the property is valued at £90,000 and he managed to rent it out for 20 weeks.
His investment return over the year is therefore a capital loss of £10,000 (£100,000 - £90,000) and income of £5,000 (20 x £250), i.e. a £5,000 loss overall.
The most common investments for children invest in the stock market ('equity investments'). This means buying shares in companies in the hope those companies prosper. When investing in shares your capital return comes from changes in share prices,
while income comes from any profits that companies pay back to shareholders each year, known as 'dividends'.
When making an investment, always try to understand where the returns might come from. It can help you better understand the risks involved.
For a more thorough guide to investing please read the Candid Money guide to investing here.
While there is, in theory, an almost limitless number of ways to invest for your child (e.g. stock markets, art, lottery tickets... etc.), in practice there are five common options:
Junior ISAs / CTFsSharesUnit TrustsInvestment TrustsFriendly Society Bonds
You can invest up to £4,128 a year into a Junior ISA for your child. Both savings and investment options are available.
If your child instead has a Child Trust Fund (CTF) then this can be topped up by up to £4,128 a year.
In both cases, children can't get their hands on the money until they're 18, gains are tax-free and there's no further tax on dividends.
Because most investments, including those outlined above (except Junior ISAs/CTFs), cannot be held by a child until they're 18 (16 in Scotland), they'll need to be owned meanwhile by
an adult or trust for the child's benefit.
If owned by an adult with the investment 'designated' for the child, the adult is liable for both income and capital gains tax until the investment is eventually held by the child.
If the investment is held in a 'bare trust' for the benefit of the child then the child will be liable for both income and capital gains tax. Note that if the income
(including dividends) exceeds £100 (per parent) a year then the parents will be liable to income tax. This doesn't apply to gifts made by others, e.g. grandparents.
Children have the same annual income tax and capital gains tax allowances as adults, currently £11,500 and £11,300 respectively.
For more details of designated accounts and bare trusts click here.
Kid's Investment Jargon
Here's some of the more common kid's investment jargon you might come across:
|Bare Trust||A simple trust that allows investments to be held for the benefit of a child until they reach 18. Someone else (trustees) takes responsibility until then.
|Designated Account||An investment that is owned by an adult but intended to pass to a child when they reach 18.