The financial ties that bind

Saving and investing has become a family business with decisions taken by one member increasingly impacting on others.

And this trend will increase next year when payment or non-payment of the proposed children's tax credit, due in April 2001, will depend on the earnings of the parent or parents.

Pooling two incomes could send women back to the dark days of a decade ago, when a married woman's earnings had to be reported to her husband and included on his tax return.

This week's proposal by the education secretary, David Blunkett, to set up two-year "foundation degrees" to offer a new, vocationally focused route into higher education, will further increase the number of young people who are still "at school" past the legal age of majority.

Finding and filling the places will be the task of educationalists, but funding those years, and the three- or four-year courses taken by those aiming for more traditional degrees, is the task of parents.

Even if they have obtained student loans, grant-deprived undergraduates must now either take part-time jobs during term time - with all that could mean for the hours spent on their courses - or ask their parents for help.

For parents who can afford it, the choice is either paying out of taxed income as offspring progress through higher education or saving up ahead of time.

Ken Rooney of Personal Assurance Financial Services in Milton Keynes says university finance is "clearly not something people think about in their children's early years. But even without the plan for higher fees for premier league universities, the current annual cost of tuition fees is likely to rise to around £1,800 from the present £1,025 by the time a child aged three reaches 18."

Mr Rooney reckons that advance planning will make a great deal of difference. Just how far in advance determines the strategy.

Jane Lane-Potter at advisers Fiona Price & Partners believes that the longer you can save, the more reason you have to head for more speculative investments.

"Always think perspective," is her advice. "The bank is not the best home for money that you will not need for several years hence. Even if you go back 50 years, there are no 10-year periods when a good portfolio of UK shares with dividends added back in did not beat bank or building society accounts."

Ms Lane-Potter believes in roping in grandparents and the increasing number of aunts and uncles who may be childless but who would like to help nieces and nephews.

She suggests that it could be worthwhile to draw up a formal trust agreement, despite the cost of lawyers.

"Those who give to children have to draw a line between making an outright gift and then risking the youngsters splurging it all on a car, designer clothes or an expensive holiday - or retaining control and then worrying about how it might affect their tax position, including inheritance tax if they die."

Setting up a trust enables control and beneficial ownership to be separated.

A less costly route could be to save for the children but keep the money a secret until they are old enough to be sensible with it. One way is to set up a bank or building society deposit, or a unit or investment trust plan, and designate it for the child by adding her or his initials to the name on the passbook or certificate.

The ending of advance corporation tax means children can no longer reclaim the tax deduction on shares and unit trusts. But they can have gross interest on savings by filling in form R85 from their bank or building society.

Parents have to be careful with the money they give if they want to avoid tax. The inland revenue accepts that the interest or dividend can be paid tax-free irrespective of the parent's personal tax rate, provided that the amount does not top £100 per child per parent. If it amounts to £100.01 then the entire sum is taxable.

One solution is to look at tax-free investments such as national savings certificates, national savings children's bonds or friendly society plans.