We’ve been gifted £8k for our newborn’s school fees: Where should we save it and will we pay tax?

My wife and I recently had our first child. Her parents want to provide financial support for their future education. They are based in the US and recently sent us $10,000 (£8,050).

The easy way of managing this would be to put into a junior Isa, and give it to her when she turns 18 and perhaps considers university. 

However, there is a possibility this could be something we use before she turns 18 to contribute towards a private education.

We are therefore not sure what product is suitable that allows us to save the money and give us easy access in case we need to use it before she turns 18. 

At the moment, we both maximise our Isa allowances each year. As my wife has to file a US tax return, she would not want the money to be transferred into an account in her name as she would need to report this to the Internal Revenue Service.

Can you suggest a savings account that is easily accessible, and can be put in my child’s name? A.T

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Harvey Dorset, of This is Money, replies: A good way to save money for your child’s future is to use a junior Isa.

A junior stocks and shares Isa can be a great way of growing the money you put away for your child, making the most out of the 18 years you have before your child can access the money. 

Although it is not without risk, investing over a long period of time will hopefully allow this money to grow to maximum effect, benefitting from compounding returns and levelling out the risk of short-term market fluctuations.

You can also put money in to a cash version if you prefer, and grandparents can directly contribute to junior Isas of both kinds. 

These accounts offer tax-free saving and grandparents can contribute.  

One thing you will need to consider is the money is accessible when your child reaches the age of 18. Then, it will be her money to use as she wishes.

This might not be the right choice if you are hoping to use this money to pay for a private education, but it could still be useful once your child reaches 18 and potentially chooses to go to university.

This is Money spoke to two experts to find out whether this is the right move for you and if there might be a better way of investing in your child’s future.

Simon Stygall, independent financial adviser at Flying Colours, replies: The good news is that there are lots of options when it comes to putting away money for children. 

However, you need to consider the potential requirement to access the money before your children turn 18, and whether the account should be in your child’s name.

You mentioned that your first child was born recently and made reference to school fees. I’m therefore assuming you may need to access the money on an ongoing basis.

When a parent establishes a non-Isa-sheltered savings account for their child, the parental settlement rules need to be considered. If the income from the account surpasses £100 each year, then all of this income would be taxable as the parent or parents’. 

This does not apply if the gift is made directly from the grandparent to the grandchild, however. 

Although they are an excellent product, a junior Isa won’t be suitable if you do need the money for school fees, since they do not allow access before the age of 18.

If the money needs to be accessed regularly and within the next five years, it would be worthwhile finding a high-interest instant access or a short-notice savings account.

Children’s fixed-rate bonds are an option, as the account would be in the child’s name, with you as a signatory on the account. 

However, they may incur penalties if you wanted to access the money before the term of the bond, and so a series of fixed-rate cash accounts in the child’s name with different maturity dates could be suitable.

It is also important to bear in mind that we are in a period where interest rates are likely to be reducing, therefore, it is important to shop around to find the savings accounts with the best rates of interest.

If the investment time horizon and potential point of access are likely to be further than five years away, then investing the money outside of cash could be considered.

It is possible to set up a designated account for investment funds, investing on a child’s behalf, so that they become the beneficial owners. Importantly, the funds held in a designated account are not held by the child – they would be solely owned by you, the parent.

The designation relates to the intention of passing the funds to the child at some point in the future. This would provide flexibility, in that parents can make use of the funds, and there is no obligation to hand over control to your child at 18 years of age. However, the account would not be in the child’s name, which I understand is a key objective.

Another option is to establish a trust, and to gift the money to that trust. You would be the creators (settlors) of the trust, as well as trustees, and your child would be a potential beneficiary. This could be a good option in that you could control how the money is used. However, trusts are a complex area, and there are several considerations concerning tax and the duties of trustees.

All the options have advantages and disadvantages when it comes to control, the money’s value being eroded by inflation, and the potential to put the money to work and increase the overall pot.

So, the answer depends on the time frame, as well as the degree of flexibility and control that you, as parents, want or need.

It would be important to consult a qualified tax adviser as regards the tax liability that you, as parents, would have if investing on behalf of children and any uplift in the value of the investment. 

A lawyer would also be needed to facilitate setting up a trust. I’d also like to point out that specialist advice is required regarding your wife’s status as a US citizen.

Ed Monk, associate director at Fidelity International, replies: Two of the primary considerations set out by you are the need for flexibility – the ability to withdraw money to support their child before they reach the age of 18 – and for a solution that doesn’t require inclusion in a US tax return. 

This latter point is best addressed by ensuring any funds are held in the name of the child or their father.

One potential solution is to establish a bare trust, with the father as trustee and child as beneficiary. 

This structure ensures the funds are accessible before the age of 18, making it a flexible option which allows both parents to contribute. Within this structure, the mother cannot act as trustee as it would trigger US tax reporting requirements.

Under UK tax law, any income or gains generated within the trust would be taxed as the child’s as there is no minimum age requirement. 

With their personal allowance, savings allowance, dividend allowance and capital gains allowance, it’s possible to manage the trust tax-efficiently and potentially keep it fully tax free. However, it’s essential to monitor these allowances to avoid exceeding them.

A Junior Isa would not be suitable in this case, as funds cannot be accessed before the child turns 18. 

Similarly, a Junior Sipp is too restrictive for short or medium-term goals. 

Financial advice is recommended to set up the trust correctly and manage it within relevant tax allowances.