Investing For Children
A financial nest egg for your child could mean no HELP Debt, entry into the property market sooner, an established share portfolio or covering expenses for a career path.
With interest rates at an all-time low, leaving money in a bank account isn’t necessarily going to give your child the best value or returns. Instead, by harnessing the advantages of compound interest and time, you can create a foundation for a successful future.
However, investing for children can be daunting, with complex structures, like legal and beneficial owners, capital gains and high minor tax considerations.
Issues to consider
To establish an investment for a child under 18 years old requires an adult to act as the legal investment owner on behalf of the child. It is also important to understand that income from such an investment has tax implications, up to 66%, depending on who is the beneficiary and how the investment income is spent. Capital gains tax may be applicable depending on when the investment is transferred to the child.
Finally, each investment option has its own individual limitations, which must be considered.
Three common investment options
Given the long-term nature of investing for children, some common options can include; investing as a trustee, investing directly, and insurance bonds. Let’s look at them individually:
Investing as a trustee
Managed funds, family trusts and share investments on behalf of a child are common types of trustee relationships and are bound by particular terms and conditions. In the case of shares: dividends, capital gains/losses, tax rates and submission of tax returns are based on whoever rightfully owns and controls the shares, not necessarily whose name they are in. There is also the issue of keeping trust money completely separate for accounting and tax purposes.
Investing directly as a gift
A gift can be an alternative way for a child to acquire an investment, such as shares, property or money. For example, an adult can purchase shares and then gift them to the child. This could have lower tax implications, say if the shares are invested in the name of the lowest-earning adult. However such wealth transfers can affect pension or social security benefits of the adult. Capital gains and income tax are still relative especially if the recipient is under 18 years old, in which the high minor tax rate could apply.
Investing in investment bonds
Investment bonds (also called insurance bonds) is a product offered by an insurance company or friendly society and combines an investment fund and a life insurance policy in one product.
Investments are taxed within the fund at up to a 30% flat rate, which makes the product ideal for investors in a high tax bracket. They are an attractive choice as they have many tax-effective savings particularly if they are held for 10 years.
However, there are limitations such as the 125% contribution rule, which requires additional contributions to be maximum 125% of the amount that was contributed in the previous year. Adding too much money or making no contributions resets the 10-year time frame.
Selecting an appropriate strategy
Selecting an appropriate strategy for your child will depend heavily on the age of your child, and the goal that you have in mind. This means seeking targeted financial advice before deciding, so your particular situation and goals are firmly accounted for. Everyone's situation will be different, so please reach out to discuss what is best suited for you.