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Q:
Please can you give advice on the benefits of a Child Trust Fund compared to an ISA for money over and above that provided by the Government.
M Brody, Via email
A:
The CTF is effectively an ISA for kids, one that will legally become available to them at 18. Obviously, kids cannot invest into their own ISA until 16, at which point they can open a cash ISA, so this is a way of investing for them while leaving your own ISA allowance available for saving for your future.
The downside is a lack of flexibility as the money can’t be accessed until they reach age 18 and then the money is theirs so they can do what they like with it, which is fine as long as you have a responsible 18 year old!
It is a particularly tax-efficient savings vehicle for parents, as investments outside the CTF (and the NS&I Children’s Bonus Bond) may be taxable depending on the amount of interest earned. This is known as the “£100 rule” simply because that’s the amount of income that can be earned tax free each year. On any money gifted by a parent into a child’s name, if the income earned on that money is greater than £100 (per parent), the whole amount is taxed as though it belongs to the parent, therefore, at their marginal tax rate!
Investing into an ISA in your name for your child is the best way to retain control of the money. If you choose the ISA route, you need to consider earmarking it in your will, so that if you should die before you give the money to your child, it is clear that it was designated for them.
In summary, there are pros and cons to investing into the CTF – you just need to decide which route offers you and your child the most benefit.
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Downsizing option
25 July 2008 [0 comments]Q:
We have lived in our very large house in a very small village for nearly 25 years, where we have built a life and are very happy. The house now has a very high value in financial terms.
However, we are now looking at the prospect of having to make a downsize move, mostly because of the financial implications of owning a house of this size, such as higher heating bills, council tax, insurance and other essential expenditure.
We have looked into the area of equity release schemes but have constantly been told that it is more cost effective to downsize to a smaller property. However, even if we did downsize to such a property, it would still be of a high value in this area.
Additionally, it would be very expensive to make this move, considering the potential costs involved in moving home. We have calculated that it will cost us close to £100,000 to move, taking into account estate agent fees, legal fees, stamp duty and various moving costs. This £100,000 is immediately wasted and, on a personal note, we would have to start a new life in our retirement.
These factors therefore bring us back to equity release. We would require an additional income of up to £20,000 per annum for possibly a ten-year period before we need to move. If the calculation was for a property valued at £1.5 million, we would only need an increase in the property value of around two per cent a year to cover the withdrawal of £20,000 for income and the interest payments. Would this be the preferable solution in investment terms for our situation, rather than taking the money out of the property by downsizing, especially in view of the current outlook for house prices, and then investing the funds elsewhere and paying more tax on the funds we have released?
G Boot, Kent
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