Control your kids' cash with a trust fund
Trust funds are not just for stars of the TV hit series Made in Chelsea. More ordinary folk can benefit from them, too.
David Downie, technical expert at Standard Life, says parents who are worried their offspring might blow the lump sum they have so carefully put aside for more important spending, such as university bills or a mortgage deposit, can take certain precautions.
"The Junior Isa (Jisa) offers an option to build up a fund for your child in a tax-free environment. However, the funds belong to your child and they will get access at age 18," he says.
"Imagine that the maximum Jisa contribution is saved from birth to the age of 18. That's a pot of almost £67,000 before you add tax-free interest or growth over that period. While this may be sufficient to meet the costs of their time at university, you may have concerns about 'too much too soon' and giving them access to the money.
"Would they use it wisely? Or could it encourage reckless spending once they are at university, away from home and outside parental influence? This lack of control could be a worry for many parents."
The answer may be to set up a trust to hold the savings. Downie adds: "A trust is a simple way of holding funds, which are for the benefit of someone else. The trustees, who are often the parents or grandparents, can control how and when someone gets access to the trust. This could be delayed to an older age."
There are some inheritance tax (IHT) points to understand if you're using a trust, but the benefit is that funds could then be drip-fed out, rather than taken as a large lump sum.
However, parents should be aware that Isas and Jisas cannot be held in a trust.
Choosing a trust
There are many types of trust and some are taxed differently from others, some quite heavily. The main ones you are likely to come across are:
Bare trust - This is not a way of avoiding tax. It is simply a way of holding the investment for the absolute benefit of your children and is often used to hold shares or other investments on their behalf. They can be used for adults too, who can ask for the capital and income from the trust at any time, whereas children cannot.
Discretionary trust - Income and capital from the trust is distributed entirely at the discretion of the trustees. No beneficiary has a right to receive anything, only an expectation they might benefit.
Life interest trust - The net income, after administration costs, from this type of trust must be paid to the beneficiaries by the trustees. Trustees usually also have the discretion to distribute capital to the beneficiaries if and when they need it.
If parents or grandparents set a trust up to help reduce future IHT, for example, they will probably be advised to transfer assets worth no more than the amount you can leave without paying IHT (this is called the nil-rate band and is £325,000 for a single person in the current tax year).
If you put in more than that, the excess will be charged IHT at half the prevailing rate - so 20% currently. Mike Warburton, tax partner at accountancy firm Grant Thornton, says: "If you put in £425,000 for example, that's £100,000 over the nil-rate band, so you will be charged £20,000."
The legal wording of a trust needs to be clear, so seek professional advice and expect to pay as much as £1,000 or more to set up certain trusts.
For more information on trusts and finding a trust lawyer, visit:
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.