Children can normally operate their own bank or building society account from around the age of seven. However, there are other types of investment which can be suitable for children, which are legally held on their behalf by adults until they have grown up. There are two main ways in which this can be done:
You can invest up to £4,128 a year on behalf of a child each year, which can be held tax free. The child is able to take control of the investment from age 16 and has access from age 18.
Designated Accounts If you want to keep control over the money you have given to a child, such as a building society account or a savings plan, you can hold it in your own name but ‘designate’ it in the child’s name or initials too. This has the effect of ring-fencing the money for the child. The investment remains under your control and you will be liable for any tax which may be payable if the income generated is over £100 per annum. However all income arising from investments designated by anyone other than parents is always treated as the child’s and will therefore be tax free if they do not exceed their personal allowance (children have the same personal allowance as adults).
If you want the money you give to be the child’s property, then the simplest way to do this is through a bare trust. The investments are still in your name but you hold them in trust on behalf of the child. They are treated as the child’s for tax purposes, which can be particularly useful if you are likely to be making full use of your own annual capital gains tax allowance or are a higher rate taxpayer. When the child reaches 18, they will gain full control of the investments subject to the completion of the appropriate paperwork.
Other Types of Trust If you would like to make a gift to a child but do not want them to gain control when they reach 18, you could put the money into another type of trust, such as an accumulation and maintenance trust, where the trustees decide whether or not the beneficiaries receive any income or capital until they are aged 25, and even after that they may hold the capital back. Alternatively, you could use a general discretionary trust for greater flexibility.