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How to develop £20,000 into a house deposit for your children

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Thu 29 Oct 2015

How to develop £20,000 into a house deposit for your children

Many parents like to plan for the future, and some are in the position to help their children get on the property ladder. If this applies to you and you are considering buying a house for your son or daughter, then we have can show you your options and how to go about this in this feature.

 

The majority of parents opt for a basic trust whereby they're saving cash for their children, the only trouble with this is that it has the potential to give your child too much control over the money. This is because once they hit the age of 18, they’re granted full rights to the income and capital, therefore having the responsibility of where to invest the money.

 

However, if you go down the route of a discretionary trust, aptly named due to the fact that the trustees have discretion over how to use the money, with parents able to stipulate an age restriction. Furthermore, other conditions can be imposed.

 

It’s worth considering what a solicitor can do to help when it comes to draw up the trust for you if you have set your sights on saving a large amount of money (in excess of £20,000) or if you think you’ll be adding complicated conditions. Typically, a financial adviser is equipped to help you set up the trust.

 

But unlike with the bare trust we originally referred to at the top of the feature, where the child can make use of their own tax-free allowance, the rules differ when it comes to discretionary trusts. At present the individual allowance is set at £10,600 per person.

 

In terms of a discretionary trust, the initial £1,000 of investment growth is only ever taxed at the basic rate. Any growth recorded above this is taxed at 45%. Any further increase on the original amount you invested, following costs and any losses, is taxable. For example, if a £20,000 investment gains in excess of 5% annually the returns will be pushed into the 45% tax band.

 

Investing over a 2-decade period

 

In order to be as tax-efficient as you can be, you should structure investments towards growth as opposed to income. This is so that you limit the dividend income - and consequently the tax.

 

Growth funds fit the purpose because their attentions are focused on growing the value of the investments instead of paying shareholders a regular income.

 

If you want to avoid tax totally and have complete control over the money, the parents could hold the money in their ISAs. The individual limit for 2015 is set at £15,240.

 

If you intend to invest over a 23-year period you can afford to take a higher level of investment risk, which could mean having a significant weighting in shares. You could hold at least 50% in shares, or even up to 100%, if you’re going on a 23-year time-frame, of course.

 

 

While we are not financial advisors, we do like to see people succeed on the property ladder, and what better way to do that than using let my house, Winkleigh services from Howes Estates?