Investing gifts

Q My mother, who is 83, recently made some cash gifts to my three children
(aged l7, l5 and 9 years) in order to avoid payment of Inheritance Tax on her death or reduction of her liability.

The gifts are just over ?800. While l am happy for the oldest child to have access to this money, l am less confident about the ability of the younger children to handle such a large sum.

Can you recommend suitable investments for the 15 year-old - tying the money up for three years, say - and the youngest child? Would you recommend National Savings products, such as their Capital Bond? It is likely that my mother will repeat these gifts at yearly intervals.

My mother has also expressed a wish to pay for my oldest child to attend university; for example tuition fees and something towards living expenses. I anticipate the annual cost would be around ?5,000. Is there a tax efficient method you could recommend for making such a provision?

DS

A Under existing legislation individuals can give up to ?3,000 in the form of capital each year free of any Inheritance Tax liability. They can also make gifts of up to ?250 income to whoever they want. Further gifts of income can be made, free of tax, providing that it can be proved subsequently that they were made without affecting the living standard of the donor.

In practical terms the Revenue should not be too worried by fairly modest gifts of income, but for larger sums they would require evidence that only truly surplus income was being given. Remember too that after seven years any gift becomes free of tax. It is a bit of grey area, but I would think that it would be worth risking a potential tax liability to help fund the university fees because any tax would be payable out of your mother's estate.

As to the present gifts, l would not recommend the Capital Bond because it runs for a five year term and is fixed at 5% gross at a time when interest rates are very likely to rise over the next year.

Both the Dunfermline and Scarborough building societies, for example, offer special three years bonds for children's accounts up to age l8. They currently pay flexible interest rates of 4.90% and 5% respectively.

For the younger child the longer-term investment period would normally favour exposure to shares to obtain the best capital growth, but the charges and risk involved could well outweigh any extra gain. So l would tend to stick initially with the same 3-year bond accounts and take a view when they mature.