What is the tax position of the child and donor?
Investments outside a Junior ISA or SIPP are liable for tax. The investments are not held in the name of the child - rather they are held in trust for the child, so it is necessary to consider the tax position of the child and also the donor.
The child's tax position
Children have the same £11,850 personal income tax allowance and £11,700 capital gains tax allowance as adults. They also have a £2,000 dividend allowance and up to a £1,000 personal savings allowance. This means while deposit savings accounts and other investments, such as unit trusts and shares in a Junior Investment Account, are taxable, the sums involved usually fall within their allowances and no tax is due.
The donor's tax position
Children can only benefit from tax-free income of up to £100 a year on income earned on gifts by each parent. If they receive more, the parent 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 have contributed the capital. Then all the income will be taxable in the hands of the child.
This information should be viewed as an indication of the rules currently applicable and any figures quoted relate to the current tax year (2018/19) unless stated otherwise. Tax law is notoriously complex and we cannot replicate every rule, nuance or exemption here. Therefore you should not make, or refrain from making, any decisions based on this information alone. If you are in any doubt as to the suitable course of action we recommend you seek advice.
Remember tax rules can change and any benefits depend on your personal circumstances.