Another approach when it comes to saving & investing for children’s futures is a Bare Trust.
Like a Junior ISA, the Bare Trust is in the child’s name and they get full access to it when they turn 18. But, unlike a JISA, you can access the money anytime you like. The only limit is that the money needs to be used for the child's benefit. That’s why it can be a good option when you’re saving up for:
Or any other large cost for them which you have to cover before they’re 18.
Even though this flexibility can be really attractive for many families, a Bare Trust is not tax-free like a Junior ISA. This means parents might have to pay income tax or capital gains tax. This all depends on how much your investments grow in value or how much money is paid into the Bare Trust from your investments.
So how much tax do you have to pay? Well, it all comes down to a few factors. Let's go through each one.
But remember, if you're unsure about your own circumstances then it may make sense to speak to a financial adviser or an accountant.
If the Bare Trust is set up by you as the child’s parent or legal guardian and you’re paying money into the Bare Trust, then whenever £100 or more of income is earned from your investments (think dividends) then that money will be taxed at the rate which you pay income tax e.g. 20%, 40% or 45%.
If the Bare Trust is set up by someone else (think grandparents, aunts, uncles or godparents etc.) and they pay the money into the Bare Trust, then any income earned from your investments will be treated as your child’s income for tax purposes, meaning your child’s personal allowance limit (currently £12,500 for 2022/23) can be used to reduce the tax bill.
This is one of the reasons why a Bare Trust can be a good option for any grandparent or family member that wants to gift money to your child.
What happens when the investments grow in value and you sell them at a profit?
Well, all gains (“profit”) in a Bare Trust are subject to tax and treated as your child’s for tax purposes. Like adults, children have a capital gains tax (“CGT”) allowance each year and this year's allowance (2022/23) is £12,300. This means the Bare Trust will only need to pay tax on any gains made over £12,300 in a single tax year.
How likely this is to happen really depends on:
Let's give you an example:
Let's say you contribute £65 a month from the day your child is born. If the money grows at 5%, then at the age of 18 you would have invested just over £14k and your balance would be just over £22.5k. In this example you would have made just under 8.5k, meaning even if you sold all the investments in one go you would not need to pay tax.
Want to learn more about Capital Gains Tax? Just take a look at the blog we wrote about that here for a few more examples.
A Bare Trust is just a legally binding way of registering an investment you’ve made not for you, but for someone else. Because of this, it's a little more complicated to open than a Junior ISA and usually requires a solicitor or advisor to draft the legal agreements for you.
We've teamed up with Forsters LLP, a leading UK law firm which specialises in family planning and tax to simplify this process and digitise the creation of a Bare Trust. You can now do it in less than 20 minutes all from your mobile phone. If you're interested, you can sign up here.
Don’t forget, when you invest your money is at risk. You might end up with more than you put in - or you might end up with less. This blog isn’t our advice, so please don’t change your plans or buy or sell any of your investments based on it. We don’t know your money situation, your plans for the future or how much experience you’ve got. If you’re unsure you should speak to a professional financial advisor.
Please note that how you are taxed depends on your individual circumstances and may be subject to changes in the future. If unsure, speak to a qualified tax advisor.