Investing for Children explained
About Killik & Co We pride ourselves in being a relationship firm. Each client has their own dedicated Broker, who acts as the single point of contact to provide award winning investment advice and trade execution, as well as handling any administrative matters. We provide our clients with wealth planning, investment management and advisory stockbroking services with access to all major asset classes equities, fixed income bonds, commodities and currencies - in over 30 markets worldwide. Independent research, from our team of analysts, who are frequently quoted in the press, is available to all our clients along with our Daily Note by email and our quarterly magazine Confidant. Killik & Co, your partner for investment and wealth advice. From 6 April 2015, it is possible to transfer a Child Trust Fund to a Junior ISA. Investing for Children Saving for a child s future is one of the most important investment decisions a parent or grandparent will make. And there are a lot of different investment vehicles available to you, beyond a bank deposit account. This booklet explains the various options available through Killik & Co. Following the abolition of the Child Trust Fund (CTF), HM Treasury have launched a new investment vehicle for children called the Junior ISA (JISA), available from 1 November 2011. But the Junior ISA is not the only option available to provide for your child or grandchild s future. In this booklet, we have provided information on the following: Self Invested Personal Pensions (SIPPs) for Children Child Trust Funds (CTFs) Bare Trusts Discretionary and Fixed Interest Trusts Junior ISA These are all products offered by Killik & Co and we can help with every aspect from setting up a trust to dealing with the associated tax affairs. For advice on which option is best for you, given your individual circumstances and what you want to achieve for your child or grandchild, whether it s saving for schools fees or providing a nest-egg for the future, speak to one of our Brokers on 020 7337 0777. Self Invested Personal Pensions Introduction A Self Invested Personal Pension, or SIPP, is a personal pension arrangement that offers greater control of the pension investments within a tax efficient wrapper. Contributions Many parents or grandparents wish to set funds aside for their children or grandchildren and see a SIPP as being a good tax efficient vehicle for doing this. Contributions can be made up to a maximum of 3,600 per year. After taking into consideration the basic rate tax relief available, this will have a cost to the parent or grandparent of 2,880. The effect of compounding could potentially lead to a significant build-up of funds over 55 years. For example, net monthly contributions of 240, (equivalent to the full annual limit of 3,600) compounded with a yield of just 3% would give a fund after 55 years of over 500,000. A yield of 5% would give over 1 million *. Access to pension An income and a lump sum are paid from pensions but these can only be accessed once the holder reaches age 55. The contributions paid in on behalf of a child would therefore be a very long term investment. The child would however be able to take on the management of the SIPP funds from the age of 18, in the meantime the funds would be managed by the settlor (parent or legal guardian) with our advice. Child Trust Funds Introduction Child Trust Funds (CTFs) were introduced by the Government to encourage children and their parents to save for the future. Children born between 1 September 2002 (who would qualify for child benefit) and 1 January 2011 were eligible for a CTF. 2 Investing for Children explained www.killik.com
Following the child s birth, the parents were sent a voucher for 250 ( 500 if they were on income support) with the same amount being sent to them again when the child reached the age of 7. This additional funding stopped in September 2010 and children born after this date only received an initial voucher for 50. At the age of 18, the child becomes automatically entitled to all the funds held within the CTF. If they wish to, rather than withdrawing the proceeds, they may roll these over into an ISA (without utilising any of their annual ISA investment limit). Tax Treatment of CTFs All income accumulated within a CTF is free of tax. Likewise any capital gains are exempt. Additional Contributions Each year (from one birthday to the next), contributions of 4,080 may be added to the CTF. Anybody can make a contribution to the CTF on behalf of the child - i.e. it does not have to be a Parent. Charges Killik & Co offers a Stocks and Shares CTF for which there is no annual management charge. The only fees payable are the standard dealing commissions. Custody charges will also apply once the account value reaches 20,000. Please see the Killik & Co Rate Card for further details. Bare Trusts The distinguishing features of a bare trust are in fact more like a designated account. A bare trust is simply an outright gift of capital to a minor who because of their age is unable to take immediate possession. Facts surrounding Bare Trusts: Once a deed has been prepared it is irrevocable Assets placed in a Bare Trust are treated as potentially exempt transfers for IHT purposes. This means that if you survive for seven years after making the gift, the capital value will fall outside your estate The beneficiary has an immediate and absolute right to the fund and any income arising from it The trustees have no discretion Income tax is chargeable to the beneficiary as if they hold the funds in their own name (unless the bare trust was created by their parent in which case if the annual income amounts to more than 100, it is assessed as the parent s income) When the minor becomes of age (18 in England and Wales), they become absolutely entitled to the funds and these must be transferred to them There are no restrictions on the amount that may be placed into a bare trust. Discretionary or Fixed Interest Trusts The Finance Act 2006 radically changed the tax treatment of trusts and effectively now treats all trusts as relevant property trusts in the same way that previously only applied to discretionary trusts. Prior to the Finance Act 2006, Accumulation and Maintenance (A&M) trusts were an effective way of saving for children as they were a form of discretionary trust but were not subject to the same tax charges. This type of trust has effectively been abolished and an 18-25 trust may now only be created by a parent in their Will. This type of Will trust is a method of safeguarding your childrens inheritance without suffering the tax consequences of a relevant property trust. (Although if your child is to benefit after age 18, tax charges will arise). Regardless of the less favourable tax treatment of modern trusts, they can be an efficient way of ensuring that wealth remains in the family. The rules surrounding all trusts can be complex and we are only able to provide a brief description in this booklet of the types of trusts available. Discretionary Trusts Discretionary trusts are sometimes set up to preserve a capital sum for future generations. The trustees have control of the funds and will use their discretion regarding how much and when payments should be made to a class of beneficiaries. This class of beneficiaries may be as large or small in number as you like but they must amount to more than one and it must be possible for the trustees to be able to identify who might fall into that class, e.g. all my grandchildren. The extent of the trustees discretion is laid out in the trust deed. Discretionary trusts have become less favourable over recent years due to the tax treatment. www.killik.com Investing for Children explained 3
However, they are a way of protecting capital and there is no reason why a beneficiary should become absolutely entitled to a share of the fund at age 18. If you would like to invest for a child until they are say age 25 this is one of the very few options available to you. Fixed Interest Trusts The fundamental difference between fixed interest and discretionary trusts is that a beneficiary s entitlement is fixed in the trust deed and the trustees have no discretion to alter this. A fixed life interest trust would give the beneficiary(ies) (known as the life tenant(s)) an interest in income until their death with further beneficiaries (or remaindermen) becoming entitled to their share of the capital fund at this time. A fixed interest trust could also be established to give a beneficiary an interest in income until a significant birthday when they would become entitled to capital. Again the tax treatment can be unfavourable but there is scope to create a trust to suit your requirements. Junior ISA Since November 2011, Junior ISAs have been available to all children resident in the UK under the age of 18 who do not have a Child Trust Fund. From 6 April 2015, it is possible to transfer a Child Trust Fund to a Junior ISA. Anyone can contribute to the Junior ISA, up to a total subscription of 4,080 each year. The child will become entitled to the ISA at the age of 18 but can become the registered contact and therefore have the ability to manage the assets held within the Junior ISA wrapper from age 16. The Killik & Co Stocks and Shares Junior ISA may be invested in a variety of ways including direct equities and our Multi-Manager service: The Killik & Co Multi-Manager is a discretionary managed investment service. The service is designed to optimise potential returns for investors, whilst diversifying risk, by investing in a portfolio of funds. The service incorporates some of the world s leading asset managers, specially selected by our own Killik & Co Fund Research Team. The funds are generally chosen via a thorough screening process, combined with interviews and continuing close contact with the fund managers. The ongoing monitoring process is vital to future investment returns. There are four broad investment approaches available depending on individual investment objectives and attitude to risk: Cautious, Balanced, Growth and Absolute Return. The Killik & Co Multi-Manager provides access to high quality funds that might not otherwise be available to individual investors while providing flexibility in types of funds we can invest in (shares, bonds). Many funds have initial charges; however, Killik & Co has negotiated reductions in these fees: in the vast majority of cases they are completely waived for transactions within Multi-Manager. Please see our Ratecard for details of our charges for this service. Summary Whether you wish to build up a nest-egg for a child s future, plan for their education or make lifetime gifts for inheritance tax purposes, it is likely that Killik & Co can offer you something that meets your requirements. We are unique in that we can offer professional advice on all aspects of investing for children, from transferring over a Child Trust Fund to creating a complex trust to advising on the individual investments held within a Junior ISA. We can also advise on the associated tax implications and even complete the relevant tax forms for you (subject to an additional charge). For more information please contact your Broker. * The FCA provides lower, middle and higher assumed growth rates to use in illustrations of what you might get back from an investment. These are known as standard rates. The standard FCA middle growth rate is 5% a year when investing via a SIPP and we have also used a lower rate of 3% as a comparison. There is no guarantee that your child s SIPP value will grow by either of these rates. The value of your investments can fall as well as rise and this example is not a reliable indicator of future performance. 4 Investing for Children explained www.killik.com
Comparison chart Product Income Tax on investment income? Capital Gains Tax on investment gains? Inheritance tax on gift into fund SIPP No # No No*** Child Trust Fund No # No No*** Bare Trust Yes** Yes Yes Discretionary Trust Yes Yes Yes Fixed Interest Trust Yes Yes Yes Junior ISA No # No No # UK income tax may be deducted at source from certain investments but this would be reclaimable ** If a parent makes the gift into a bare trust, income is assessable to tax as their own income if this exceeds 100 per year *** Though there are no IHT implications, there are annual limits of the amount that may be gifted each year into these plans Where there are IHT implications (e.g. on the various types of trust), the gift will initially be treated as a potentially exempt transfer (or PET) and will fall outside the estate for IHT purposes if the donor survives 7 years. Comparison chart Product Advantages Disadvantages SIPP Child Trust Fund Bare Trust Discretionary Trust Fixed Interest Trust Junior ISA Tax efficient, few restrictions regarding types of eligible investment. Tax efficient. No restrictions on the amount that can be placed into the fund, full capital gains tax exemption limit available. Preserves capital for future generations without an outright gift being made, trustees have discretion regarding amounts payable to beneficiaries, unrestricted in terms of investment class. Preserves capital for future generations without an outright gift being made, unrestricted in terms of investment class. Tax efficient, can be rolled into an adult ISA on maturity with no tax implications. Very long term, restrictions on annual amounts payable into the fund Not applicable to children born after 1 January 2011, restrictions on annual amounts payable into the fund, some restrictions on types of eligible investments. Trustees have no discretion, the beneficiary can demand the fund is transferred to them outright at age 18. Taxable at the (unfavourable) rate applicable to trusts, recipients of income are at discretion of trustees, not practical for smaller sums, need to have trustees & potential associated costs plus legal costs of drafting trust deed, lower Capital Gains Tax exemption limit applies. Assessable to income and capital gains tax, no discretion regarding payments to beneficiaries, need to have trustees & potential associated costs plus legal costs of drafting trust deed, lower Capital Gains Tax exemption limit applies. Long term, restrictions on annual contribution limits, some restrictions on eligible investments. www.killik.com Investing for Children explained 5
Killik Explains Educational Video Series It has always been our philosophy that when it comes to investment, knowledge is everything. We have therefore committed to enhancing our clients understanding with a series of educational videos called Killik Explains which covers a broad range of investment topics. We highly recommend that all Killik & Co clients view arguably the two most important videos - Lifetime Savings: The Risks and Why Investors Must Diversify. www.killikexplains.com from Tim Bennett It is important that you understand that there remains risk with all investment and you may not get back the original capital invested. The value of your investments may fall as well as rise, and the past performance of investments is not a guide to future performance. The tax treatment of investments may change with future legislation. Call a Broker today: 020 7337 0777 info@killik.com www.killik.com Killik & Co is a trading name of Killik&Co LLP, a limited liability partnership authorised and regulated by the Financial Conduct Authority and a member of the London Stock Exchange. Registered in England and Wales No OC325132. Registered office: 46 Grosvenor Street, London W1K 3HN. A list of partners is available on request. Killik & Co (Middle East & Asia) is regulated by Dubai Financial Services Authority (DFSA) and is a branch of Killik & Co LLP. Telephone calls may be recorded for your own protection and quality control. The charges and commissions contained in this brochure are current at the time of publication but are subject to change. Please ask for a current copy of the Terms and Conditions. This financial promotion has been approved by Killik & Co. Investing For Children Explained 04.15