Tax Efficient Savings for Children

19th January 2015

Tax Efficient Savings for Children 

Parents wishing to give substantial sums to their children meet a tax ‘stumbling block’ because all income over £100pa earned by children under 18 from parental gifts is taxed on the parent. 

There are two easy ways round this; 

1.    Invest up to £4,000 before 5 April 2015 in a ‘Junior ISA’ – these can be cash or stocks and shares. The allowable amount for 2015/16 is £4,080. 

2.   Invest up to £2,880 before 5 April 2015 in a simple personal pension plan – HMRC will add £720 to the fund making it up to £3,600 and this can be done each year. 

The accumulated fund on the Junior ISA cannot be accessed until the child reaches age 18 and they then have unlimited access – not necessarily a good idea! 

Under current rules, pension funds cannot be accessed until the age of 55 and for an 18 year old, this must seem literally a lifetime away.  However, the compound effect of having paid money into a fund that will be invested for up to 55 years is very significant and, depending on how much has been invested, this can provide an excellent basis for a comfortable retirement.  If you would like to know more about the compound effect of long term investments, please get in touch. 

Alternatively, income which arises on financial gifts from grandparents and other relations is not subject to the same tax restrictions as gifts from parents although one has to be mindful of any inheritance tax implications. 

 

Written by Peter Hedgethorne, Director

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