Ask Sindie: Who can you trust with a baby's shares?
The best ways to invest for children... And beware of the 'boiler room' scams
Sunday 11 December 2005
Q: I was asked to be godfather to a friend's son and, rather than the usual gifts, I thought I'd give him something he can use in the future - and have settled on £1,500 in shares.
After all, they might be worth a lot more in 16 years' time.
But do I just buy the shares for him and hold them until he's 18, or is there some kind of trust I can put them in? Also, are there any tax issues I need to be aware of?
A: Trusts have been around for hundreds of years as a way of protecting shares, money, funds or property from the taxman, and also of keeping financial assets that might otherwise be spent out of the way of temptation.
They surged in popularity during the 1980s as the privatisation of companies such as BP and BT encouraged parents to set up trusts for their children and put in some of the shares.
Today, there are scores of different trust classes, each offering different kinds of tax break.
In your case, you will probably want to go for the most basic: a "bare" trust. This is created when you buy the shares and put them in your godson's name.
When he reaches the age of 18, all income and capital within the trust will pass to him and you won't have any control over what happens to the money, says Paul Falvey, a partner at accoun- tants Grant Thornton. "The trust's assets will legally belong to the named person."
As for tax concerns, any growth in the value of the shares inside the trust is treated as your godson's. And assuming he doesn't have a whole host of generous benefactors offering large share portfolios, it's highly unlikely his annual capital gains tax allowance - currently set at £8,500 - will be broken when he comes to cash in his investment.
Although the act of putting the shares in your godson's name is enough to create a trust, it's better to formalise the arrangement to avoid any disputes that may arise in later years.
"You could get a simple deed drawn up at a solicitor - at a cost of a couple of hundred pounds," explains Mr Falvey. "Alternatively, you could simply write a letter to your godson explaining that the shares are his when he turns 18, and that he can do what he wants with the money."
If a bare trust doesn't appeal, you could consider an "accumulation and maintenance" (A&M) trust, which gives you greater control over the money. Your godchild must wait until he's 25 before he has the right to receive any income (built up from share dividends) from the trust's assets - and you can still decide what to do with the original investment.
With an A&M trust, though, there is a price to pay: the trust's income and any capital gains will be taxed at 34 per cent.
A discretionary trust will give you the most control over your money. You can actually change the beneficiary if, say, you fall out with your friend and no longer want to give the money to your godson.
If you are considering setting up anything more than a bare trust, make sure you visit a financial adviser or tax planner to sort out the appropriate structure and to plan for the costs. Expect to pay at least a few hundred pounds, depending on the complexity of the trust.
Finally, it is worth noting that there are four key elements to a trust: the individual who puts the money or assets in (settlor); those who hold it (trustees); the beneficiaries; and the trust itself. And don't forget, you can choose the trustees and be one yourself.
Q: My wife has been called three times in the past couple of weeks by some sort of investment broker selling shares in a fledgling company called A-Chemstyle (or close), which is apparently involved in the chemicals industry.
I've checked on the internet, curious about this "new" company and why the broker has targeted us. I could find nothing.
Is this a scam? We don't plan on doing anything but I am intrigued.
A: This has all the hallmarks of a classic "boiler room" scam - usually run by an overseas outfit selling shares in non-existent or worthless companies to unsuspecting individuals.
In most cases they ask for a small minimum investment and then convince you to hand over a great deal more, before vanishing with your money.
Without the name of the broker that is trying to sell you stock, it is impossible to check the Financial Services Authority's website ( www.fsa.gov.uk). This has a list of companies that have fallen foul of the regulator in the past and are not authorised to offer goods or services in the UK.
Next time they ring, firmly decline the offer. These scams always end in tears.
If you need help from our consumer champion, write to Sindie at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS or email firstname.lastname@example.org. We cannot return documents, give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given
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