Maximising tax benefits 

Flora and Rufus, like their parents, have their own personal tax allowance, which in theory should be adequate to cover investment income or savings interest on a substantial portfolio...

...but it's not quite that straightforward.

The taxation of Rufus's savings income depends first on who sets up the plan, and second, on how much income is generated within it.

• If the capital in his savings plan comes from relatives, friends, or anyone other than his parents, then any income generated will be set against Rufus's own personal allowance, currently £4,745
• Assuming interest paid at 5 per cent a year, Rufus would need investments of almost £95,000 to generate enough income to breach the personal allowance
• However, it's a different story for Rufus's mum and dad. The first £100 of income produced by the financial contributions of each parent (i.e. £200 in total) is treated as belonging to Rufus himself and offset against his personal allowance; but any further income will be treated by the Inland Revenue as belonging to his parents, and they'll be taxed accordingly.

It's also worth mentioning that many grandparents these days have inheritance tax (IHT) issues. Regular savings made for grandchildren not only benefit the next generation but can help to reduce their taxable estate. There's no IHT to pay on regular gifts made out of normal expenditure - so, for example, monthly contributions to a savings plan or termly school fees paid by a grandparent would be tax-exempt.  An IFA can give more guidance on planning for tax efficiency.

More on the complexities of saving for children and tax (including information on the new Child Trust Fund to be introduced in April 2005 for children born after 31 August 2002) is available from the Inland Revenue . In brief, the Government will contribute £250 to each child's fund at the outset. This can then be supplemented by the child's family or friends, up to £1,200 each year, until the child reaches eighteen. All capital gains and income are tax free for the life of the fund.