Tax

In this Blog, I look at regular savings options in a changing taxation landscape, consider how to ensure effective gifts are made for minors and explain what rules apply when determining which investments can he held in particular tax wrappers.

The topic covered in this Blog is:

Gifting for Children - Designated Accounts

I often receive questions on the subject of account designations and whether or not they enable a child's tax allowances to be used rather than those of the investor (usually a parent) in respect of income and capital gains. This all depends on whether the investor is willing to give up the beneficial ownership of the investments held in the designated account and if this can be proved to the satisfaction of HMRC.

By giving up the beneficial ownership of the investments in the account, the investor is effectively creating a bare trust that will allow the child full access to the account once they attain age 18. The initial gift is normally exempt for Inheritance Tax purposes, although it will be a potentially exempt transfer to the extent that it is not exempt. Children have tax allowances in the same way as adults so any growth can be offset against the child's Capital Gains Tax allowance while income can be offset against the child's personal allowance (although if the investor is a parent, and the income generated during the tax year exceeds £100, the tax due will be charged to the parent).

However, the investor may not want the child to have unrestricted access to the account at 18 in case it would not be in his/her best interest at that time. In this case the aim is therefore just to set up the account for the child and nominally set aside the funds for investment, but not to give up the beneficial ownership. When the account is actually assigned to the child it will be treated as a disposal for CGT purposes and all gains and income will be assessed on the investor up to the point at which the account is transferred to the child.

If the aim is to use the child's tax allowances by making an outright gift, this would need to be fully documented to confirm this intention to HMRC. Any account designation would therefore need supporting evidence. Alternatively, a bare trust could be established with the deed providing the documentary proof of the gift. Where neither of these approaches is used, any designation could be challenged by HMRC as not being a true gift so that the child's allowances would not be used and any tax liability would fall on the person making the gift.

The bare trust approach should be used where such investments are held by us as it is only possible to report income and capital gains tax in respect of the portfolio owner which, in the case of an account designation, is the person making the gift.

Did you know in 2009 the Government had received over 2 Billion Pounds from IHT alone?