MINORS: Money for the kids
 Christmas
is coming and the geese are getting fat - and so could your child's
interest payments, provided you know what to look for. The following
points aren't all inclusive, but raise them with your adviser to start
the ball rolling. If nothing is appropriate now, there might be something
for you to consider at some more appropriate time.
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Children have their own personal tax allowance at the same rate as an adult. In the tax year 2004/05 this means that income up to the allowance limit of £4,745 escapes tax deduction. The Inland Revenue acknowledge the special situation of children by allowing them to take interest on savings without deduction of tax. The institution which holds the savings or investment should provide you with form R85 to apply for the income without deduction. You can claim back tax that has been deducted in error by submitting repayment claim form R40(2003) to the Inland Revenue.
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Children also qualify for the full capital gains tax allowance, currently £8,200 in 2004/05.
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To stop parents being too generous to their offspring … the Inland Revenue tax all income earned in excess of £100 per annum where the interest is from money given by a parent. The rule does not apply to other relatives and friends. Where more than this is earned, the hapless parent must pay tax on the lot, not just the excess over the limit.
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Stocks and share and insurance ISAs, are available only if you are age 18 or above. However, 16 and 17 year olds can invest up to £3,000 p.a. in a cash ISA.
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Shares are an option, but only through a bare trust with the shares held in the name of an adult. The child is the beneficial owner, however, and entitled to the dividends. The trust assets must go to the beneficial owner when he or she is 18.
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NB. Although some trust wordings can seem deceptively simple, don't be tempted to put one together yourself. Although a form of words may seem appropriate, and it is not difficult to obtain 'standard' wordings, it is safer to obtain professional advice before embarking on this route
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Shares may be held another way, by means of unit or investment trusts. The same rules apply as for shares, in that the account will be in the name of an adult, designated in favour of the child. Watch out for the tax position, though, as it is no longer possible to reclaim tax deducted from dividends.
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Tax free growth is offered by certain friendly society accounts, although the conditions are rather limited - must be maintained for ten years, and limited annual investment. Nevertheless, as part of a larger portfolio it may be worth considering.
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National Savings & Investments may be a useful part of a portfolio, as there is usually some sort of tax free contract available for children and there are always premium bonds.
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