February 2025

We are regularly asked to provide advice to parents and grandparents who wish to invest for their child or grandchild’s future, potentially to help with higher education costs, or towards a deposit for their first home, the cost of which has increased significantly over recent years. Data from Statista shows that the average deposit for first-time buyers in England in the 2022/23 tax year was £53,414. This is more than double the average deposit a first-time buyer needed to find in 2017/18, according to Savills. Even more stark is comparing the data to 1997/98, when the average first-time buyer deposit stood at just £2,200.

With the pressures of modern living, many young people will struggle to save for the average deposit, amidst costs of rent, household bills and living expenses. It is, therefore, often the case that children turn to the “Bank of Mum and Dad” for help, which could well coincide with a time when parents are aiming to clear mortgages of their own or trying to focus on their retirement planning.

Arranging appropriate investments for children can ease the financial burden for families and help provide the necessary funds to help pay for further education, or a house deposit. There are, however, decisions that need to be reached in respect of the structure of the investment plan, and whether to grant the child access to the funds at 18.

Tax-efficiency, but drawbacks

Two of the most popular methods of arranging children’s investments are structured so that the funds automatically belong to the child on their 18^th birthday, which may not be a sensible step.

A Junior Individual Savings Account (JISA) allows a maximum investment of £9,000 per annum, and this can be funded by parents or other relatives, which can help with Inheritance Tax (IHT) planning. The JISA benefits from tax free returns and automatically converts to an adult ISA at 18.

A bare trust is another tax efficient way to save for a child’s future. The funds in trust belong to the child but are managed by the trustees (usually parents and grandparents) until they reach the age of 18. All income and gains generated within the trust are assessed on the child, except when the trust is created by a parent. In this case, income that exceeds £100 per tax year is assessed on the parent. It is important to note that this rule does not apply to grandparents.

Maintaining control

A common conversation point with clients are the risks involved when giving control of an investment to a child at the age of 18. Many parents and grandparents have concerns that the child may not make financially responsible decisions at this point in their life. As we mentioned above, the most common uses of investments for children are funding university costs or using the funds towards a deposit on a house; however, funds are unlikely to be needed for either purpose at the age of 18. Student loans cover the cost of tuition fees, and maintenance loans may cover some of the costs of living. The average age of a first-time buyer is 33 years old, and realistically, it is unlikely that anyone turning 18 will have sufficient earnings to support mortgage payments.

The risk is, therefore, that the child could use the funds for other purposes, such as holidays or socialising, and given the lack of control, could lead to disappointment that funds have been used unwisely, or could generate unwanted family friction.

The alternative is to exert control over when the child gains access to the funds. This is often a more palatable option; however, there are drawbacks that need to be considered. Instead of a bare trust structure, where the child owns the investment from the age of 18, a discretionary trust offers far greater flexibility and control. The trustees have complete discretion as to when funds are paid, and to which beneficiary. This is an ideal way of avoiding automatic access at 18, whilst still gifting funds, so that they leave the parent or grandparent’s potential estate. Discretionary trusts do, however, suffer a more punitive tax regime, which starts with the gift into trust and covers both income tax and capital gains tax. Additionally, discretionary trusts also suffer a potential charge to IHT at each ten-year anniversary.

Despite these drawbacks, careful planning can help reduce the tax burden significantly, and investment structures such as investment bonds can also avoid the need for trustees to account to H M Revenue & Customs each year. Segments of the Bond can be assigned to beneficiaries at a time trustees agree is appropriate, which could ease the tax burden further.

An alternative option is for parents and grandparents to set up separate investment accounts for their children, which remain held in the name of the parent or grandparents. Often such accounts carry a designation, to ensure that the investments remain separate to other accounts held. Naturally, such an approach would not be effective for IHT purposes as the investment remains in the name of the parent or grandparent, and the owner remains liable for income tax and capital gains tax; however, with careful selection of tax wrapper, a more tax-efficient approach can be adopted.

Getting the right advice

Parents and grandparents who wish to save for the next generations can explore a range of options, each with positives and drawbacks. Perhaps the best starting point to consider is whether you are content to give automatic access to the funds at 18 years old. In many cases, maintaining greater control is attractive, and with careful planning, the more onerous tax burden can be effectively managed. Our independent advisers have years of experience of advising parents and grandparents in this area. Speak to one of the team to start a conversation.

When choosing a financial adviser, one of the primary decisions is whether to use an independent or restricted firm. Whilst the Financial Conduct Authority require firms to set out their service proposition at the outset, many consumers may not be aware of the difference between the two.

Firms offering an independent advice service, need to be able to recommend all types of retail investment and pension products from firms across the market without restriction. This contrasts with a restricted advice service, which may either be restricted by the type of products they offer, the number of providers they choose from, or both.

Both independent and restricted advisers must have achieved the requisite level of qualification, and therefore it is unfair to consider restricted advice as being “poor” advice; however, the constraints under which a restricted adviser needs to work could result in a compromised solution.

Investment selection

One of the key differences between restricted and independent advisers is the range of investment options offered. Restricted advisers generally build their investment proposition from a limited range of “in house” funds. Whilst many of the major restricted advice firms use external managers to manage their investment solutions, the adviser will only be able to choose investments from the pre-selected available panel of funds. This could mean that the investment portfolio designed for the client doesn’t necessarily fit their needs and objectives.

Even more restrictive are the increasingly common mixed asset solutions that many restricted advisers are now regularly recommending. These ready-made portfolios are largely passive in nature, and with limited active fund management, the potential for outperformance is reduced. These mixed asset solutions are undoubtedly more efficient and cost-effective for the restricted advice firm but offer a wholly inflexible and “one size fits all” solution.

In contrast, an independent adviser can select funds without restriction, which can lead to improved performance over the long term. Our analysis shows that a range of popular mixed asset funds (shown in shades of red and orange on the following chart) have largely tracked each other over the long term. The performance of the CDI Progressive Growth portfolio, which is built from our independent investment process and invests in a similar asset blend to the sample group, is shown in blue.

Performance of a range of restricted multi-asset funds (red/orange) compared to performance of CDI Progressive Growth portfolio (blue), over the last 7 years

Source: FE Analytics February 2025

Whole of Market advice

There is a wide range of financial products available on the open market, and new solutions are regularly released by product providers, which are often designed to improve tax-efficiency in response to changes in legislation. Using an independent adviser will mean that an adviser is free from constraint and can select from these products if they fit a client’s needs and objectives; however, a restricted adviser may not even be aware that such products and solutions exist, or if they are aware, they may be unable to recommend the product if it is not within the panel of options permitted through the restricted advice process.

Good examples of the drawbacks of restricted advice can be found when considering Inheritance Tax (IHT) planning, which is clearly an area of concern for many clients. A range of providers have released products designed to mitigate IHT liabilities, including those that seek to qualify for Business Relief. Most stocks listed on the Alternative Investment Market (AIM) will qualify for business relief, and many Discretionary Managed IHT solutions focus on AIM stocks as a way of mitigating an IHT liability. The recent Budget announced that AIM investments will only qualify for half of the available Business Relief from April 2026 and qualifying AIM investments will therefore face a potential IHT tax charge of 20%.

Being able to look across the whole of the market means that an independent adviser can consider asset-backed Business Relief solutions. These investments differ from AIM stocks, as the investment is made in unquoted companies that carry on trades such as renewable energy, storage and logistics, or secure lending. Asset-backed Business Relief investments are designed to produce more predictable returns, without the associated volatility inherent in AIM stocks; however, the returns generated by asset-backed investments may be lower than AIM stocks in strong market conditions. Perhaps the most important difference is that qualifying asset-backed investments will continue to receive 100% IHT relief (i.e. the full 40%) on investments after 6^th April 2026, subject to an overall cap of £1m held in Business Relief assets.

Business Relief solutions are only one of a range of different products designed to mitigate a potential IHT liability. There are a variety of different insurance solutions available across the marketplace, which involve the use of protection policies and are often written in trust. A restricted advice proposition may not have the scope to consider all these options.

Making the most of our independent status

We are proud of the independent holistic advice service that we provide to our clients, and our advice process takes full advantage of our independent status, aiming to tailor the most appropriate solution to each and every client circumstance.

Understanding the marketplace is an ongoing process, as new products are released, and existing products are adjusted regularly. Our Investment Committee undertakes regular reviews of available platform services, and we use independent and external research to provide us with an unbiased view of the costs and features offered by each platform. The Committee also uses expert external research and analysis to review Inheritance Tax solutions, Venture Capital Trusts, Enterprise Investment Schemes and many other products.

If you are using a restricted adviser, it may be wise to consider what your restricted adviser isn’t telling you. You may be missing out on potential solutions that could be a better fit for your needs and objectives, which could also mean lower charges and potentially improve investment performance and/or tax-efficiency. Speak to one of our independent advisers to discuss your existing arrangements. We would be pleased to undertake an unbiased and impartial review and explain where improvements could be made.