Child trust funds and junior Isas are exempt from the £100 rule' (whereby if the interest a child earns from an investment given to them by a parent comes to £100 or more a year, it will be taxed as the parent's income).
This means parents can invest up to £3,600 a year per child without being taxed, says Tax Tips & Advice. But don't let the grandparents do it, as they can invest tax-effectively for your children in other ways.
All they do is buy "any investment they think suitable" in their name, with the grandchild named as the beneficiary. This creates a bare trust.
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The income counts as the child's for both income tax and capital-gains tax (CGT) purposes. Every child has the same annual tax-free allowance and CGT exemption as an adult, so at today's interest rates, a child could have "up to £250,000 on deposit" before the interest would trigger a tax bill.
Unlike formal trusts, a bare trust costs nothing to set up and run: grandparents just need to make sure the child's income and gains stay within the tax-free limits. Also, the money can be accessed at any time (say, to pay school fees).
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