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Key takeaways from this article
- Understand the multiple savings options Quilter offer for clients looking to save for children
- Growth potential and tax efficiency varies by product
- Starting early with the right risk profile makes a real difference
Saving a nest egg can get children off to a flying start in life. As the cost challenges of education, buying a first car or getting on the property ladder all continue to worsen, more and more parents and grandparents will look to you for help. This article looks at the options available with Quilter and the tax considerations with each option so that you can navigate this important advice area with confidence.
Different account types offered by Quilter
Your clients can save tax efficiently for their children or grandchildren up to £9,000 each tax year. They can also transfer existing JISAs or Child Trust Funds across to us.
Considerations with a JISA
- Generous allowance of £9,000 a year currently
- No income tax or capital gains tax is payable on investment returns
- Greater growth potential when compared to cash savings
- Access provided at 18
- Investments can go down as well as up
Your clients can save tax efficiently for their children or grandchildren up to £3,600 gross each tax year. They can also transfer existing pensions across to us.
Considerations with a CRA
- Tax relief (20%) on contributions up to £3,600 per annum
- No income tax or capital gains tax is payable on investment returns
- Starts a critical savings tool for retirement as early as possible
- Investments can go down as well as up
- No access to the money before normal minimum retirement age
A flexible way of holding a wide variety of assets in one convenient place, outside of a tax wrapper. Can either be opened by a parent or grandparent on behalf of the minor child or held subject to an irrevocable designation.
Considerations with a CIA
- No allowance, a minimum of £2,500 is required to open
- Regular investment options via Direct Debit
- Income tax and/or capital gains tax is payable on investment returns
- Greater growth potential when compared to cash savings
- Investments can go down as well as up
Considered a ‘non-income producing asset’ income and gains on linked investment are assessed on the UK insurer rather than the bondholder. Opened by a parent or grandparent and often combined with a trust when investing for children/grandchildren.
Considerations with a CIB
- No allowance, a minimum of £10,000 is required to open
- No personal income tax or capital gains tax is payable on investment returns
- Greater growth potential when compared to cash savings
- Investments can go down as well as up
- Taxed under an event based income tax regime – Chargeable Events meaning higher rates of tax are potentially payable (when compared to CGT) on gains made when money is taken
An online cash ‘portal’ providing access to easy access, notice and fixed term deposit accounts. Can be opened by a parent or grandparent on behalf of the minor child but has no formal designation over the money.
Considerations with a deposit account
- Simple, straight forward savings
- Anytime withdrawals for easy access
- Delayed access where a notice or fixed term account selected
- Inflation risk due to no capital appreciation
Tax considerations for each option
|
Account type |
JISA |
CRA |
CIA - with designation |
CIA / CashHub- no designation |
CIB - in trust |
CIB - no trust |
|
Treatment of payments in |
Payments in will be gifts for IHT purposes - potentially exempt transfers - subject to any available exemptions |
Payments in will be grossed up (20%). They will be gifts for IHT purposes - potentially exempt transfers - subject to any available exemptions |
Payments in will be gifts for IHT purposes - potentially exempt transfers - subject to any available exemptions |
As no formal designation in place, the account is still owned by the parent/grandparent. Therefore, no gift at point of payment in |
Payments in will be gifts for IHT purposes - the type of gift will depend on the trust used, subject to any available exemptions |
As no trust in place, the bond is still owned by the parent/grandparent. Therefore, no gift at point of payment in |
|
Treatment of any existing investments transferred as a gift |
N/A |
If an existing CIA is designated for someone else there is a disposal at market value for CGT purposes. It is also a PET in the same way as payments in. |
N/A |
If an existing CIB is assigned to trustees of a trust this is not a chargeable event for income tax purposes. It is a gift in the same way as payments in and the IHT treatment will depend on the type of trust. |
N/A |
|
|
Treatment of ongoing investment yields/income |
No personal liability to income tax on investment income
|
Interest and dividends will be taxable on the designee (the child) with the exception of where the gift has come from a parent and parental settlement rules apply. |
Interest and dividends will be taxable on the parent/grandparent who owns the CIA |
No personal or trustee liability to income tax on investment income. Quilter Life & Pensions do apply a charge Quilter Life & Pensions do apply a charge described here |
No personal liability to income tax on investment income. Quilter Life & Pensions do apply a charge described here |
|
|
Treatment of investment gains |
No personal liability to gains made on investments |
Gains in excess of annual exempt amount taxable on designee (the child). |
Gains (CIA only) in excess of annual exempt amount taxable on the parent/grandparent who owns the CIA |
Bonds are taxed under chargeable event rules. This doesn't apply to investment gains as such but when money is taken out of the CIB |
||
|
Tax on maturity |
No tax on maturity / withdrawal post 18 |
When money is withdrawn post-retirement, marginal rate income tax will apply subject to pension commencement lump sum |
No tax on maturity as the beneficial owner is the same before and after maturity i.e. the child |
Gains made on withdrawals (CIA only) in excess of annual exempt amount taxable on the parent/grandparent who owns the CIA. If gifted at this point to the child it will be a gift for IHT purposes - potentially exempt transfer |
When money is distributed to a beneficiary there could be IHT exit charges if a discretionary trust has been used. Gains on surrender will also apply see above. |
Gains on surrender will apply see above.
If gifted at this point to the child it will be a gift for IHT purposes - potentially exempt transfer |
|
Other ongoing tax considerations |
After maturity the JISA automatically becomes an ISA with a full ISA allowance |
N/A |
No IHT periodic charge will apply as taxed like a bare trust |
N/A |
If a discretionary trust has been used, IHT periodic charges may apply every 10 years |
N/A |
Other child savings options
The article highlights some options available through the Quilter platform to enable you to manoeuvre discussions around these with your client. There are of course, other options not covered here, for example Premium Bonds or children’s bank accounts but the tax treatment will be similar for most particularly in terms of IHT and gifting. Some products will offer tax free returns but limit the amount that can be invested, others will have no specific tax incentives but offer unlimited contribution levels.
The important point being to start as soon as possible and consider the investment horizon and attitude to risk when recommending the right solution.
The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.