Children's Corner 2

• You can invest in an investment trust on behalf of a child either with a lump sum or with regular savings. The minimum lump sum investment is usually £1,000 and regular savings schemes start from around £30.
  
• Some investment trusts are specifically targeted at the children's market.

• The Individual savings Account (ISA) has replaced personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs). Children will not be able to hold an ISA in their own names (the qualifying age is 18).

• Friendly societies offer tax-free savings plans for children, which invest in the stock market. Note those key words `tax-free`. Other stock market investments for children will be liable to tax.
  
• There are two types of bond offered by friendly societies:

1. with-profits bonds, which grow through the regular addition of bonuses;
   
2. unit-linked bonds, where the value of the bond is determined by the performance of the underlying fund in which the bond is invested.
   

• Unit-linked bonds are riskier because the final value of the bond at its maturity date is determined by the value of the underlying fund at that precise time. But over time these bonds have the potential to perform better than with-profit bonds.
  
• The minimum investment into one of these bonds is £10 a month, making them an affordable way to invest in the stock market and, hopefully, build a nest egg for the child. Because the bonds are automatically tax-free, the maximum you can invest is £25 a month, or £270 a year.
  
• A child can only have one bond at a time up to the value of £25 per month and it must be kept at least 10 years to retain its tax-free status. The bond can be kept until the child's 18th or 21st birthday, to allow for greater growth.
  
• Family Assurance's best selling children's tax-exempt savings plan is The Junior Bond. The Junior Bond is also available in an ethical format.
  
• Because of the way charges are made on friendly society bonds, if you cash in during the early years you could get back less than you paid in. Please remember investment values can fall as well as rise.
  
• Tax credits on UK dividends are reclaimable until 04/2004, after which they will cease.

• When giving money to a child, some thought should be giving as to who has control over it. Clearly, it would be unwise to give a child a large sum of money to spend as they wished, and small regular savings can turn into considerable sums, so someone in a position of responsibility needs to keep an eye on things.
  

• Historically, unit trusts have proved far more profitable than savings accounts: an investment of £50 a month for 10 years in the average UK capital growth unit trust would, by 30 June 1999, would have been worth £12,400. If you had put the money into the average building society account it would have grown to £7,130.

Source: Association of Unit Trusts and Investment Funds.

• There is a wide range of unit trusts available for adults to invest in on behave of children. Some funds invest in large UK companies, others in companies which are ethically or ecologically responsible. Basically, whatever your preference, there will be a unit trust to suit.
  
• Family Assurance has just launched their Children's University Trust which is designed for parents to save for the costs of their child's further education.
  
• Family Assurance also offers a Children's Ethical Trust, which invests according to strict ecological, environmental and ethical considerations.
  
• Contributions start from £30 a month or you can invest a lump sum of £500 and make additional contributions of £20 as and when you choose. (Remember with this sort of investment, values may rise or fall and you may not get your investments back.)

Click the jigsaw button to go to the CJR Associates Unit Trusts page.

Investment Trusts

• The normal way to invest in an investment trust for a child is for the adult to register the shares in his or her own name, with the child's name or initials added to show the investment is not for the benefit of the adult. This is known as a `designated account.`

Unit Trusts

• The rules are more or less the same for both unit trusts and investment trusts, although some unit trust managers will accept savers from the age of 14. Adults can buy units in their own name and add the child's initials to indicate the units are for the child. This is known as a `designated account.`

• Friendly Society Bonds and National Savings Children's Bonus Bonds are automatically tax-free so there is no tax to pay.
  
• Where a savings scheme does not have a tax-free status, the interest earned counts as income and so a child might have to pay tax on the interest earned.
  
• Children have the same tax allowance as adults (£4,335 per annum 1999/2000) providing the money has not been invested by the parents. So as long as a child's total income does not exceed this amount, there will be no tax to pay on interest from their savings.
  
• Parents who invest generously for their children should consider their own tax position. if a parent invests in, say, a unit trust or bank account for their child, and the total annual income from these savings and investments is £100 or less, the income counts as the child's. However, if the income generated is more than £100 a year, the whole amount of income is taxed as if it were the parent's.
  
• In practice, few children are taxpayers, although their savings may be taxed unless the savings scheme provider is informed. 
  
• If you open a bank or building society account for a child who is a non-taxpayer, you should complete the tax-exemption form R85 on the spot.
  
• This rule does not apply if the money is invested by others, such as grandparents, aunts or uncles.
  
• To reclaim any tax which should not have been paid, contact your local tax office for the relevant form.
  
  

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