Investing for children - Tax and unit trusts for children

If you invest in a unit trust for the benefit of a child then the investment is still yours and you’ll pay whatever taxes you would normally pay on it. It is possible for you to “designate” the investment in the name of the child as a way of identifying that the investment has been made for the benefit of that child.

Designation is often viewed as evidence of the investor’s intention to make a gift to the child of the money invested. However, there is no legislation that supports the act of “designation” as representing a valid gift for tax purposes.

If the motive of the person providing the funds for investment was to make a gift to the child, he or she should formally document what they have done – made a gift. By doing so, the adult(s) in whose name the investment is held (if not themselves) will then be acting as bare trustee(s) until the child is 18 when he or she can take outright ownership of the investment.

This is important since the subsequent tax treatment of the investment will depend on whether it has simply been 'designated' or is deemed to be held on trust for the benefit of the child.

If the investment is not considered as being held on trust for the child, it will be taxed just like any other investment in your own name. This is because ownership of the investment still rests with you - so no gift has been made for inheritance tax purposes.

There are a number of different options you can consider if you want to put the investment in a trust. Depending on the sort of trust you choose, the investment may be taxed on either the child or the trust, although special rules apply where the child’s parents make the gift.

If you want to make a formal gift to a child it may be exempt from inheritance tax. To find out more, contact HM Revenue & Customs or you can seek professional tax advice.

Examples of exempt gifts you can make include;

• Small gifts totalling up to £250 per child each tax year. (The small gifts exemption only applies to outright gifts. It cannot be used to gift money to a flexible or discretionary trust of which the child is beneficiary).
  
• One or more gifts with a total combined value of up to £3,000 per tax year - this is your annual exemption (note, this is not on top of the "small gifts" exemption described above. For example, you cannot give £3,250 to one child and claim the whole amount of the gift as being exempt for inheritance tax purposes). If the exemption is not used it can be carried forward one year and may be used to relieve transfers in the following year.
  
• Giving a child regular monetary gifts (for example on birthdays and at Christmas) as long as these are made out of your income and you can show that making these payments doesn't affect your standard of living.

Please remember that the tax treatment of investment funds may change and the value of any associated tax reliefs will be dependent upon the investor's financial circumstances.