My wife and I recently gave birth to our second child. We are over the moon with our new baby boy. His big sister now thinks she has the best new toy ever!
As we recover from the birth and the first few weeks of sleepless nights, ever the Financial Adviser, my thoughts quickly turned to thinking about his future and how best we could ensure he had the best chances possible in life.
Some of you may be thinking it’s far too early to think about serious money matters when a new baby has just been born. But it’s decisions and planning put in place now that can make a MASSIVE difference over the long term.
University fees and student loans are a big bone of contention and what is clear is that it’s going to be expensive. Students are going to be paying for their university education for many many years after they finish.
According to The World University Rankings an average student in the UK leaves university nearly £40,000 in debt.
So let me explain what I plan to do to try and ensure this isn’t a level of debt our son will have to deal with.
Investing for Children
A little while back I wrote about how you could invest for your children and save yourself some tax at the same time.
The solutions referred to in this article are good starting points if you are not sure what you want to use the money for, or you have smaller amounts you want to invest on a regular basis.
The problem with something like a Junior ISA or a Junior SIPP is the child is limited as to when they can withdraw money, and you are limited in how much you can invest.
Whilst investing in equities (shares) over the long term is likely to lead to good returns, it’s also a good idea to minimise any tax you may pay. This is where investing on behalf of your children/grandchildren can be really beneficial not just for them but you too.
There are 5 main UK tax wrappers or products when it comes to investing.
- ISA
- Pension
- Onshore Bond
- Offshore Bond
- General Investment Account
Don’t worry about what the names mean. They all have different tax rules. You can basically hold the same investment in each wrapper but the investment will be taxed differently depending on what you choose.
For our son’s university fees I am going to use the Offshore Bond and here’s why….
Our son’s Offshore Bond
Starting today I can invest a lump sum into an Offshore Bond in my name or a joint bond in me and my wife’s name.
I will choose to invest in a 100% low cost passive equity portfolio that is diversified and invested into the great companies of the world. Being 100% invested in equities is likely to be volatile, there will be temporary declines but over a minimum 18 year period I believe the chances of significant gains are far more realistic than losses.
There will be no tax to pay whilst the investment grows inside the Offshore Bond apart from some small withholding tax.
A ‘chargeable event’ will take place when money is withdrawn from the Offshore Bond. Depending on how money is withdrawn will depend on what level of Income Tax that may be payable.
When it comes to wanting to give our son the money inside the Offshore Bond I have three choices.
- Use the accumulated 5% per year of original invested capital to make a withdrawal without paying tax or
- Encash whole ‘segments’ of the bond and use any unused Personal Allowance to offset the any tax charge.
- Gift all or part of the Offshore Bond to our son and he can then use his own Personal Allowance to offset any tax due.
It’s this third option that is usually most efficient when it comes to paying university fees. Our son is unlikely to be earning much from a job at the time whilst studying so should have a large amount of unused Personal Allowance, meaning paying any Income Tax is very unlikely.
At the point I give the Offshore Bond to our son it will be deemed a gift from an Inheritance Tax (IHT) point of view, so I need to be mindful that I would need to live seven years for this gift to be IHT free.
Alternatively I could set up a Trust for our son now and use the Offshore Bond alongside it so that the actual ‘gift’ is made now. Starting the seven year clock early.
An Offshore Bond really is a useful and often overlooked tax wrapper when it comes to investing on behalf of others.
Of course our son may decide he doesn’t want to go to university which is fine because the Offshore Bond will still be there as a future investment for him, and I can still gift it the same way very tax efficiently. Perhaps for a wedding, first house or to start his own retirement planning!
If you would like to ensure the investments for your children and grandchildren are in a place to get the best return with little or no tax paid then please give us a call.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
