Investments in the stock market are likely to generate the best long term returns for children
Stock market investment is a more risky option, but worth considering for investment terms of over 5 years (as a minimum).
For parents or grandparents, or indeed godparents, friends or family wishing to make investments for children, the stock market is likely to generate the best returns over the medium to long term (say 5 years plus).
A number of investments are available including:
- Unit trusts, OEICs or investment trusts are the type of investments most often recommended.
- Lower cost funds such as index tracking funds may be appropriate
Investments are generally held for children via a designated account. For example, Tony Smith could buy OEIC shares for his son Alistair by opening an account designated ‘Tony Smith A/C AS’. This approach avoids the need for trust documentation and means that the investment manager will send all correspondence to Tony, not Alistair. Once Alistair reaches eighteen, he can gain control of the investment, but until then Tony can make all the decisions.
Children’s capital gains are taxed at his or hers, and so gains each year up to the annual capital gains tax exemption will be tax free, even if a gift came from the parents.
Income generated from gifts made by a parent are taxed on the parent if the total income from all the gifts made to a child exceed £100 in a tax year.
These income tax rules do not apply if the gift originates from someone other than a parent e.g. a grandparent. In that case the income is taxed as the child’s. The result would usually be no tax charge, as every child, however young, has an annual personal income tax allowance.
In order to substantiate the fact that this is an irrevocable gift, it is usually advisable to also complete a ‘deed of gift’. We can assist with this.
See also Pensions for Children.
Contact us for further information.