INVESTING TAX-EFFICIENTLY

Most children can ‘earn’ up to £18,570 per year without incurring tax (personal allowance of £12,570, starting rate for savings of up to £5,000 and personal savings allowance of £1,000).

The full starting rate for savings will only be available if income other than savings income (e.g. dividend or employment income) is less than £12,570. If this ‘other income’ is above £12,570 then £1 of the starting rate for savings will be lost for every £1 of ‘other income’ above this amount. If the ‘other income’ includes dividends then a tax free dividend allowance of £500 is also available.

They will also have a Capital Gains Tax allowance (£3,000 for the 2024/2025 tax year) as well.

Children can only benefit from income of up to £100 per year on money given to them by each parent. If they receive more, the parents must pay tax on all interest or dividends at their highest rate.

There are no such problems if a grandparent, other relative or family friend has contributed the capital. Only interest or income over the child's personal allowance would be taxed.

When money or assets are paid into an account (including Junior ISAs, Junior SIPPs and Junior Investment Accounts) for someone else's benefit, they are treated as a gift. Some gifts are free or exempt from tax, others may be subject to inheritance tax (IHT).

You can normally give away up to £3,000 per tax year inheritance tax free. This is known as the annual exemption. If you haven't used your annual exemption in the previous tax year you can carry it over into the next tax year, but if you don't use it in that year, the carried-over exemption expires.

For example: if you used £2,000 of your annual exemption allowance in the last tax year you could then gift £3,000 for the current tax year, and £1,000 carried over, a total of £4,000.

On top of the annual exemption is a small gifts exemption. This allows you to give up to £250 each to any number of recipients each tax year, although not to anyone who received a gift from any other exemption.

Please also bear in mind that you can't give more than £250 and claim the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether.

You can also make 'gifts out of income' free from inheritance tax. Regular payments made out of excess income (which don't affect your standard of living) are normally exempt from IHT.

This can be a useful exemption for those wanting to contribute to a child’s investments through regular savings.

If you make gifts over and above exemptions, they may still be free from inheritance tax providing you survive seven years from the date of the gift. These are known as potentially exempt transfers.

Keeping a record of any gifts you make and noting which exemption you've used will make administering your estate easier when you die.

If you make regular gifts out of income as part of your normal expenditure you should keep a record of your after-tax income. These records should be used to demonstrate the gifts you've made are regular and you have enough income to cover them and your usual day-to-day expenditure, without having to draw on your capital.