Kids can win £1m too: a parent’s guide to buying Premium Bonds
The hugely popular Premium Bonds offered through the government-backed National Savings & Investments (NS&I) aren’t just for adults.
In fact, nearly 4% of all Premium Bonds (over 21 million people have them) are held by children under 16. The average amount held on behalf of a child is £1,400 and five children have scooped the £1m jackpot in the past decade. In total since 1994, ten kids under the age of 16 have become millionaires.
The youngest child to become a millionaire was just three years old, with one lucky kid bagging the top prize as recently as last year.
If you’re looking to buy Premium Bonds for a child, here’s what you should know – including the tax implications.
Who can open Premium Bonds for children?
Currently only parents, grandparents and legal guardians can buy Premium Bonds for children so it’s not an option for family friends, uncles, aunts or godparents. The person who buys the bonds is nominated to look after them until the child is 16, but the bond is owned by the child.
However, 2018 Budget documents revealed that NS&I is looking to make buying Premium Bonds for children “even more accessible”. Other adults, such as aunts, uncles, godparents and family friends will be able to buy the bonds for kids under the age of 16. No current date has been set for the change, but NS&I said it will announce more on this in due course.
What are the tax implications of gifting money to children for Premium Bonds?
As Premium Bonds are held by parents/grandparents but designated to a child, the usual inheritance tax (IHT) gifting rules apply, Anna Sofat of adviser firm Addidi Wealth explains.
You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can carry any unused annual exemption forward to the next year – but only for one year.
This means the first £6,000 gifted is exempt from IHT, if the allowance hasn’t already been used.
Parents can also make larger gifts (such as gifting the full £50,000 maximum for Premium Bonds) completely IHT free as long as they live for at least seven years.
Is there tax to pay on Premium Bond prizes?
A big appeal of Premium Bonds is that winnings – whether £25 or £1m – are completely free of tax. This means there’s no income tax or Capital Gains Tax (CGT) to pay on the sum.
What about interest accrued on Premium Bond winnings?
We know the prize itself isn’t subject to tax but parents may be concerned they’ll be hit with a tax charge once the winnings are removed from NS&I and placed into their own savings account or into a child’s savings account.
It’s important to note that Premium Bond winnings aren’t gifted by parents. The winnings, whether £25 or the top £1m are a prize from NS&I. HMRC says that where a child wins the sum and the capital amount is invested, it would not consider that parents had provided the funds, so the parent would not be taxed on the income.
This means Premium Bond winnings aren’t subject to the usual £100 interest rule on children’s savings (usually, any interest above £100 earned on money gifted by a parent is taxed at the parent’s marginal rate to stop parents sheltering large sums from HMRC in the child’s name).
An HMRC spokesperson, says: “The Premium Bond does not give rise to interest, so the £100 rule does not come into it. Any prize is capital (which belongs to the child) not income, so again, no income tax. If that capital gives rise to taxable income, the income is the child’s. The parent did not provide the prize money, so the £100 rule does not apply.”
Sarah Hollowell, head of tax & trustee services at Killik & Co, says: “[The £100] rule only applies where a parent has made the gift so grandparents aren’t taxed on income received from sums given to grandchildren.”
‘Is the chance of winning more exciting than earning interest?’
Anna Bowes, director of Savings Champion, says: “Premium Bonds are an old stalwart of the savings market and many children have a legacy of a small number of bonds that parents and grandparents have bought them. But they are quite different to a savings account.
“While the prizes on Premium Bonds are dished out on an entirely random basis (E.R.N.I.E was originally developed by code breaker boffins at Bletchley Park), those with larger holdings are more likely to enjoy a regular prize and those with a very small holding may win nothing at all.
“However, with interest rates low, parents can decide whether the possibility of winning something or nothing is more exciting than earning a small but steady interest. On a balance of £100, in Premium Bonds, just one prize of £25 would be far superior to the interest they could earn in a Junior ISA (JISA) for example – and the money is easily available whereas there’s no access to the JISA until the child turns 18. The best JISA rate is currently paying 3.60% (Coventry Building Society), so would produce £3.60 a year. Of course the larger the amount, the more difficult the decision.”
Unclaimed prizes won by children
According to NS&I, there are currently 135,448 unclaimed prizes held by people who were aged up to 16 at the time of winning. These unclaimed prizes are worth £4.8m.
Of the unclaimed prize numbers, 63,933 are still currently held by people under the age of 16.
The table below reveals the prize value and the number of unclaimed prizes: