Investment bonds for kids: how the 10-year rule works

Investment bonds have become a popular way for parents and grandparents to save for a child's future. They are simple to run and can be tax-effective, but they come with rules that are worth understanding before you start.

How investment bonds are taxed

Earnings inside an investment bond are taxed within the bond at up to 30%. Because tax is paid inside the bond, you generally do not need to include the earnings in your personal tax return each year.

The 10-year rule

If you hold the bond for at least 10 years, withdrawals are generally free of further personal tax. Withdraw earlier, and part of the earnings may be added to your taxable income, with a tax offset for the tax already paid inside the bond.

The 125% rule

You can add to the bond each year, but each year's contributions cannot be more than 125% of the previous year's. Go over that limit and the 10-year period can restart, so it pays to plan contributions carefully.

Education bonds

Some bonds are designed specifically for education costs and may offer extra tax benefits when money is used for eligible expenses like school fees or university.

Is a bond right for your family?

It depends on your timeframe, tax situation and goals. Our child bond accounts service compares bonds with other options, and our estate planning advice can help if you are gifting to grandchildren.