I understand that parents will in future no longer be able to reclaim dividend tax credits on a child's behalf - so what alternatives are there?
There is a specific National Savings product designed for those who wish to invest on behalf of children, known as the Children's Bonus Bond.
Issue J is currently available and the return is 6% per annum compound if the bond is held for the full five years.
These can be bought by anyone aged 16 and over for anyone aged under 16, and are therefore suitable as gifts from parents, grandparents, relatives or friends. The minimum purchase is #25 with a maximum of #1000.
Are there any tax implications?
No. These investments are completely free of UK income or capital gains tax, irrespective of who makes the purchase, and irrespective of the child's income or capital gains tax position.
The maximum is quite small so what else can you suggest?
Within the National Savings stable the only other investments worth considering because of their tax-free nature are Premium Bonds, Fixed Interest Savings Certificates, and Index-Linked Savings Certificates.
National Savings is safe but not very exciting. What is available higher up the risk scale?
Zero dividend preference shares are the next obvious choice. These are shares in split capital investment trusts.
They have a fixed investment life and a predetermined (but not absolutely guaranteed) redemption value at the end of their life. This means that if you hold on to them, the returns are fairly certain, but another attraction is that like any other share they can be bought or sold at any time.
So while holding through to redemption date might bring a likely 7.25% return, zeros have been known to return 20% in a good year, so trading out earlier at a good profit is a possibility.
What is the tax position?
There is zero dividend so zero income tax.
Children not only have their own basic income tax allowance but also the standard capital gains tax allowance, which for 1998-99 is #6800.
So capital gains tax would only kick in if a sale was realising more than #6800.
The children are very young, and I accept that the longer you hold on to shares the lower the risk. So could I take a fairly aggressive approach and back my feeling that in the medium to long term UK shares are likely to go considerably higher?
The best way to back that judgment would be to buy the capital shares of split-level investment trusts.
Their tax treatment is identical to that of zeros. Where they differ is in the risk.
When a company issues zeros, the zero shareholders have prior rights, which entitle them to the first slice of the asset cake.
The holders of capital shares, however, come last in line.
Does that mean that in the worst circumstances they might get nothing?
Yes.
That sounds risky, so what are the attractions?
The major attraction is that if you invest in capital shares, you are effectively buying a large amount of stock market exposure for a relatively small investment - what is known as a geared investment.
As a result, if you are right in your assumption that equity values will go considerably higher, then you could expect the value of your capital shares to rise much faster than, say, the FT All-Share Index.
For example, a number of capital shares have doubled or trebled in the past 12 months.
n In association with Portfolio & Pension Management, fee-based independent financial advisers of East Kilbride
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