Can you ensure your baby is a Millionaire by age 38?

October 11, 2009 by Baby Chums
Filed under: News, Tips

UK Parents can make their child a millionaire while they are still in late 30s and cut their own inheritance tax burden.

Given the public profiles of trust fund babies like Paris Hilton, you may not want to, however we spell out some simple way to acheive wealth for your child and have funds locked in till age 55, (Avoiding the Paris Hilton scenario!) you can be sure your child won’t squander the fortune you have worked hard to ensure.

Three basic steps are listed here and with action on your part, your child should be a millionaire by their 38th birthday.

Millionaire Child Step 1: Child Trust Fund (CTF)

Your child is eligible for a CTF if he or she was born after 1 September 2002, and entitled to child benefit. The returns are tax free and the Government provides you with the initial voucher worth £250 (£500 for low-income families), shortly after the birth plus another £250 at the age of seven. The Conservative party has recently ruled out the government payment except for the poorest of families, should they come to power.

CTF accounts can be contributed towards up to a maximum of £1,200 every year and children cannot access their account until their 18th birthday. Parents, relatives or friends can top up a child’s fund.

Three types of CTF’s are available: Stocks and shares CTF’s, cash-only accounts and stakeholder CTFs, which also invest in the stockmarket but have charges capped at 1.5% per annum.

To help make your child a millionaire, you need to opt for an equity (stocks and shares) CTF. By putting away the maximum amount of £1,200 every year for 18 years, as well as the £250 voucher given at birth and the top up at age seven, assuming 6% average growth net of charges for the life of the fund this should generate a total sum of £40,025.57 when your child becomes age 18. Do your own calculations.

Millionaire Child Step 1 value: £40,025.57

Millionaire Child Step 2: Make cash gifts

Another way to boost your children’s wealth and reduce your IHT bill is to make cash gifts.

You have to survive for seven years for most gifts to escape the IHT net. Unlimited gifts up to £250 a person per tax year are exempt, as are payments up to £5,000 for wedding gifts.

But what is even better is that regular gifts, of any amount of money, once made from normal income can be exempt from IHT. You must however show that you have been giving regularly and that your standard of living has not deteriorated as a result.

Remember though that HM Revenue & Customs will demand details of these gifts when the giver dies.

The Revenue also allows you to ‘gift’ £3,000 every year to an individual. So to build up the millionaire fund you need to donate £3,000 to your child from birth and ensure the cash is invested in an equity unit trust. Assuming average compound growth of 6% per annum, this should be worth £409,267 by the time year child reaches age 38.

Adding in the £40,025 built up in the CTF when your child reached 18 would boost this pool of money to some £537,634.

Recommended equity unit trusts include Invesco Perpetual High Income, Gartmore Cautious Managed and Neptune Balanced. The latter two funds invest in a mix of equities, bonds and cash.

Millionaire Child Step 2 value: £537,634
(including CTF re-invested)

Millionaire Child Step 3: Pension planning

The major boost to the millionaire fund comes from setting up a pension for your child as soon as they are born. Often parents do not realise that they can do this.

But by setting up a simple stakeholder pension plan for your offspring you can start tackling your child’s pension from day one and help reduce your IHT bill, all with the Government’s help.

With effect from April 6, when the 2008/2009 tax year begins, the basic rate of tax will fall to 20% from 22%. A parental contribution to a child’s pension will need to be £2,880 (attracting tax relief of £720) to maintain the gross maximum annual investment level of £3,600.

If you put the maximum allowance into a stakeholder pension from the year your child is born, again assuming 6% compound growth, the pot will grow to a value of £491,120 by age 38.

Millionaire Child Step 3 value: £491,120

GRAND TOTAL: £1,028,754

Between the CTF, regular cash gifts made and invested, and the pension pot you will provide your child a combined fortune of more than £1m, and all before they reach 40 years of age. They will not, of course, be able to spend all that money because the pension element will be locked away until age 55.