How to make the best of savings for a child, and tax implications.

[PiggyBankMum]

Hello - I am a name changer.

I am looking for a way to invest a large amount of money in savings for a child. A relative of mine gave me £10k at birth to help him in later life. It was used for the deposit on our house but now we have been able to release it by downsizing. I have looked at the Halifax Regular Savings Account that pays 6% interest, but I understand that tax will be payable on any interest earnings over £100.

I earn £25 p.a over the threshold for 40% tax so I assume the interest would be taxed at 40%? DS's father (not married) is on a very low income, and the money is comiing from both of us, so would it be taxed at his tax rate? Would the money come off the interest earned at source, or would I have a tax bill?

Would it be better to put the money in a Junior ISA? I understand that this is not taxed?

DP and I have not a bean in savings - we are not used to this 'problem' (I realise we are extremely lucky to be able to invest this for DS's future).

[IvanaNap]

I believe the junior ISA is the way to go - but you can only deposit so much tax-free each year - I know for adults that is just over 5k, not sure for junior accounts? So you could to this, but would have to deposit over a couple / few years.

Also (just looking into ISA's myself!) the Junior ISA can only be opened if you already have an adult ISA with Halifax - plus the 6% goes down to something like 0.2% after the first 12 months so for a constant high rate you have to move it about?!

(Looking on Martin Lewis he recommends NEVER taking all your money out of your ISA to start another, but instead to "Transfer" ISA to ISA (go into branch, fill out forms, give details of new ISA with different bank, they make the transfer). I am getting the impression that it is recommended to do this every year?! Which seems a faff and a half.)

We have nowhere near the amount you mention to invest for DC, but want a higher interest rate than we are currently getting (pennies) - otherwise we may as well be putting a few pounds in a shoe box each month for them!

[PiggyBankMum]

That's really helpful, IvanaNap - thank you.

[IvanaNap]

Really - I thought I was waffling while being no actual use
Just searching the rest of this board and I think it's just over £3k for junior ISA btw - amount you can deposit tax-free each (tax)year. I guess you could set up two ISA's in yours and DH's name (£5k each) in the meantime?!

[PiggyBankMum]

Good wheeze!

Now I need to figure out what is a good ISA...

[evilkitten]

PiggyBankMum,

You're starting from the position that tax would be payable on any interest over £100. This is only the case if the capital was given to them by the parents; for all other capital (e.g. from grandparents or other relatives), they have the same tax allowances as an adult.

If this £10k came from a relative, then the £100 limit does not apply. Your difficulty here is that the £10k has been used by you, and is only now being given to the child by you. Do you have an audit trail that shows that the source of the funds is actually the relative?

You don't really want to be setting up ISAs in your own names. Not only does it reduce the amount of ISA allowance available to you, but it would be assessed as your capital in the event of a benefit claim/divorce etc. Remember that this is not your money, it is the childs that you're holding in trust. Keep it separate, and documented. You should be acting in the interests of the child when handling it, not yourself (so did you pay back the £10k with mortgage interest, or with a proportion of the equity increase? :-) )

evilkitten.

[ADadofTwo]

Hi piggybankmum,

If you wanted a slightly different option you could look at something like Abundance Generation. They offer long term investments in renewable energy farms and also offer child accounts and trust accounts for children. You just need to think through what risk you are prepared to take, a cash ISA is very low risk, but an equity ISA or an investment through something like abundance is higher risk.

Good luck!

adadoftwo

[evilkitten]

Given the wider family has no savings, and that this £10k seems to form the child's entire capital, I can't see that there is a place for an investment in anything as high risk as abundance. It opens the investor up to huge amounts of specific risk, and has no financial protection whatsoever.