If the Conservative Party wins the next General Election, cash or shares Child Trust Funds will only be available to families earning less than £16,000 per annum. Families earning more than that amount will also be ineligible for an additional payment of £250 or £500, currently made when a child reaches the age of seven, if they already have a Child Trust Fund.
Interest on other forms of children's saving accounts is paid tax-free if it falls below the personal tax allowance, currently £6,475 per annum, but, if capital deposited by parents or step-parents earns £100, or more, per annum, it is liable to tax. There is no such restriction for grandparents, other relatives and friends, but, even so, the rate of return on children's saving accounts is often poor and a higher interest rate account may be a better alternative, regardless of the tax implications.
An ISA or "Individual Savings Account", is one alternative to a Child Trust Fund, but cannot be opened in a child's name until he or she reaches the age of sixteen. This means that parents must use up some of their own ISA tax-free allowance to invest on a child's behalf, so direct investment in shares or in unit trusts, on behalf of the child, may be more appropriate.
Direct investment in shares, like investment in an ISA, is subject to tax at 10% and once again parents and step-parents are taxed on any interest above £100 as if it was their own; investment by grandparents on behalf of their grandchildren is one way of avoiding this restriction. Perhaps the best way of making sure that all the interest earned on behalf of your child is tax-free is to invest in a unit trust with an emphasis on corporate or government bonds - a.k.a. "gilt-edged securities" or "gilts" - which usually provide regular, stable income and on which any interest earned, below the personal tax allowance threshold, can be reclaimed.
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