Top Ten Tips for investing in your child’s future

1 Use their tax allowance

Children are entitled to a tax-free allowance in the same way as adults. If their total taxable income is less than the tax-free allowance they are due, a form R85 can be completed so they receive their interest without tax taken off. Children under 16 cannot sign the form R85 themselves.

So long as the child does not become a taxpayer, they can continue to receive interest without tax taken off until the 5 April following their 16th birthday. At 16 they must complete a new form R85 and sign it themselves if their income is still less than their tax-free allowance.

2 The £100 rule

There are special rules if a parent has given savings to their child. Where gifts from a parent produce more than £100 gross income a year, the whole of the income from the gifts is taxed as the parent’s income. A child cannot claim back any tax on that income, nor can interest be paid without tax taken off.

The £100 rule applies to young people until they reach 18 or marry (whichever comes first).

The £100 rule applies separately to each parent, but doesn’t apply to gifts given by grandparents, other relatives or friends.

3 Trust accounts

A trust is a legal entity which holds assets on behalf of specified beneficiaries. The most common type held for children is a bare trust. Bare trusts can be called by another name, for example “re-accounts” or “nominee accounts”. An example of a bare trust account is “Mrs Smith re Miss Smith”.

A bare trust account held for a child can be registered for interest to be paid without tax taken off by completing form R85 (signed by the child’s parents or legal guardian).

4 Junior Isas (cash)

Introduced in November 2011, tax-free junior Isas are available to children under 16 (born on or after 3 January, 2011 or born before 1 September, 2002) who have never been issued with a child trust fund (CTF) Voucher.

Your child can’t have a junior Isa if there’s already a CTF in their name.

Funds in a junior Isa will be locked-in until age 18 and roll over into an adult Isa on maturity, although the beneficiary has the freedom to access it from that point.

Available from most high street banks and building societies, up to £3,600 can be added to a junior Is each year.

5 Junior Isa (stocks and shares)

Given the reasonably long investment time horizon for most children, the stocks and shares version of the junior Isa should be considered.

Risk and return are closely related and investing in stocks and shares is likely to bring higher benefits than cash, albeit in exchange for price volatility.

Visit www.juniorisaproviders.org for a selection of some of the better products available.

6 Child Trust Funds

These tax-free savings accounts were made available to children born between 1 September, 2002 and 2 January, 2011 with the government contributing between £50 and £500 (most typically, £250).

New accounts are no longer available, but existing accounts will remain in force and can be topped up to the same annual limit as junior Isas.

Both cash and stocks and shares versions are available, but with the accounts closed to new business the cash rates are largely unattractive.

7 National savings premium bonds

Anyone age 16 or over can invest between £100 and £30,000 in premium bonds, issued by NS&I. Parents, guardians, grandparents and great grandparents can invest on behalf of under-16s. The interest on the aggregated investments (currently 1.5 per cent) forms a prize fund and winners are drawn monthly. Prizes range from £25 to £1 million with the odds of a win around 24,000 to 1. Prizes are tax-free.

8 NS&I children’s bonds

Essentially a five-year fixed rate bond, these accounts pay out their interest tax-free. The current issue (issue 35) offers 2.35 per cent, which is not particularly attractive. However, for the small deposit amounts eligible (£25 minimum - £3,000 maximum) these bonds have their place. Early encashment is possible subject to loss of 90 days’ interest.

9 Regular savings accounts

Several banks and building Societies offer apparently generous rates in return for a regular monthly deposit. Halifax, for example, currently pays 6 per cent on its “Kid’s Regular Saver” account. However, £600 paid in over 12 months would earn just £18.97 gross, equivalent to 3.16 per cent of the capital amount. Moreover, after a year the capital plus interest is paid out and the 12-month cycle re-starts.

10 Alternative investments

Given the relatively long investment time horizon, alternative investments might be considered to add an interesting dimension to saving for children. Coins and stamps are a couple of examples. Similarly, some fine wine could be put down until the child is old enough to either sell it or drink it!