Children are entitled to the same tax allowances and reliefs available to individual adult taxpayers. For the tax year 2011-12 (ending 5 April) a child is entitled to a tax free personal allowance of £7,475 to increase to £8,105 for the year 2012-13 and exemption from capital gains tax up to £10,600 (annual CGT exempt amount).

It should be noted that anti-avoidance tax rules restrict the amount of investment a parent can make beneficially on behalf of their children outside tax advantaged savings e.g. Child Trust Fund or Junior ISA. These rules deem any income in excess of £100 per tax year to remain income of the parents for tax purposes.

However, these anti-avoidance rules do not apply to grandparents and other family relatives. Therefore, a grandparent can choose any investment they think would be suitable for their grandchildren. All they need to do is purchase the investment in their name with the grandchild as their beneficiary. In tax terms this amounts to a bare trust and the income and any capital gains belongs to the children subject to the above mentioned tax reliefs. They are simple to administer although the grandparent should keep an eye on how the underlying investments are performing. No tax reporting would be needed provided the income and capital gains remain below the exemption from tax threshold. This compares with a more formal Trust which needs to be subject to a written deed and annual tax reporting.

One advantage of the direct investment route is that funds can be withdrawn before a child reaches the age of 18 so could be useful for school fees planning. Another route is to use tax advantaged products discussed below.

Child Trust Funds were introduced ten years ago and have recently been replaced with Junior ISAs. Both these investment products allow parents (and others) to shift money, and consequently taxable income, to their children without this being subject to the anti-avoidance rules above. But these investments have limits and the funds are locked in until the child reaches age 18. Also, a parent can only put aside up to £3,600 per child in a junior ISA; the investment amount is not per parent.