Parents-to-be want to start saving for their child, but are worried reckless spending may occur once he hits 18.
In March, Rachel and Mike found out they were to have their first baby. Both soon-to-be parents want to start saving for their child’s future as soon as he is born.
When Rachel relayed their saving plan to another couple they were friends with, she was worried by the story they told her.
Their friends had also wanted to save for their son. They had contributed the maximum amount possible each year into a stocks and shares Junior ISA since their introduction in 2011. The ISA over the period had reached more than £30,000.
However, in April their friend’s child turned 18 and his Junior ISA became an adult ISA. The boy now had total control of the £30,000. He proceeded to spend £25,000 on a holiday and a new car.
There are a number of ways Rachel and Mike can avoid giving their child a huge sum of money as soon as he hits his 18th birthday, while still maximising investment growth and being tax-efficient.
If they are not already doing so, Mike and Rachel could maximise their own ISAs. Contributions made into an ISA in their own name can still be used to fund their child’s future. But it would allow them to retain control over when and how the money is spent.
Once their own ISAs are maximised, they could still pay a smaller amount into a Junior ISA. They would be safe with the knowledge that, once their son does hit 18, he will not suddenly have tens of thousands of pounds at his disposal.
Another alternative is investing in offshore bonds. If Rachel and Mike decided they did not want to save using a Junior ISA, these could provide them with more control, without compromising on tax efficiency or simplicity.
Similar to an ISA, money in an offshore bond will grow virtually tax-free (except for withholding tax) and is generally not subject to capital gains tax.
Offshore bonds allow 5% of the initial premium to be withdrawn each year (up to 20 years). This is tax deferred, so there is no immediate tax to pay. If there is any unused allowance it can be carried over and used to provide access to future cash lump sums for their child as and when they deem it necessary. There is also no need to include it on their tax returns, which suits their busy schedules.
An offshore bond can be divided into lots of segments. This means the two parents will be able to assign individual policy segments to their child whenever required, once he reaches 18.
For example, what if they have £100,000 saved in 10 different segments and they wanted to give their son £10,000 to use as he pleases? They could fully assign one of the individual segments while keeping the other nine, without incurring a taxable event. If their son chooses to keep the money invested, the offshore bond has enabled them to pass this money to him without disinvesting the money first.
As long as their child is a non-taxpayer, there could be no tax to pay when money is withdrawn. This is as long as any growth in the segments assigned is below the child’s personal allowances. Similarly, Mike and Rachel’s child could also benefit from any unused 5% withdrawals carried over on the segments assigned.
Rachael Griffin is a tax and financial planning expert at Old Mutual Wealth