What is the most tax-efficient way to set up a regular savings plan?

5 June 2013

Q

I am a higher-rate UK taxpayer and would like to set up a regular tax-efficient savings plan for my niece and nephew.Ideally, I would like to be able to recover some of my income tax for their benefit. I am happy to deem them as beneficiaries, or whatever is required, but I would ideally like to keep control of the money until they're older. Is this possible?
From
IC/via email

A

It is - depending on what you mean by "older", and whether or not you are willing to take some risk with the money (as opposed to just holding it in a deposit account).

One of the simplest ways to set up a tax-friendly account is via an investment trust savings plan, which is held in a "bare trust" for the designated child. The trust is set up as part of the initial application, so it doesn't involve additional paperwork or expense.

The child automatically becomes entitled to the money at 18, but before then you control how it is invested. Until they turn 18, any income and capital gains are taxed as the child's, not yours - which probably means there is no tax to pay as they have their own personal allowance.

The most tax-efficient way of all is to save through a junior individual savings account (JISA). As they can only have one JISA, you would need to determine whether or not they already have one and ensure whatever you pay into it does not take them above their annual contribution allowance of £3,600. You can again control the investment, but at the age of 16 the child can take over control - although they can't access the money until they turn 18.

If you want to control both the investment and the timing, you could save in your own name. Assuming you have already used your own ISA allowance, you could use a growth-orientated investment trust with little or no dividend yield. That way, you can decide how much they get and when, and utilise your capital gains allowance to sell shares in the trust without incurring tax. This gives you the ultimate control, while being very tax-efficient.