Articles have recently appeared in the specialist financial press offering advice on investment for children.

They all contain references to, for example, special deposits from banks and building societies with free gifts, National Savings children's bonds and free Rupert Bear mugs from Invesco.

The small (£270 per annum) limit available in tax-free friendly societies is mentione d with an occasional warning on costs.The crucial issues How to invest funds for a child is just one of several important factors.

Advisers should also consider:- who is providing the funds for the child;- when the child is to be able to spend those funds;- if the funds are reasonably substantial, what will be the applicable taxation regime.There are different tax consequences for different circumstances.

The position is surprisingly complex.

This complexity is rarely appreciated by financial advisers and is an area where solicitors can add considerable value.

When will the child be entitled to the capital?This is an important question.

Last year's Finance Act has increased capital gains tax (CGT) on interest in possession trusts - both lifetime and those created by a will - from 23% to 34% - after, of course, the application of the usual exemptions.

That is an increase of just less than 50%.

The CGT rate on an accumulation and maintenance (A&M) settlement remains at 34%.

Inadvertent creation of a trust can thus have potentially drastic CGT consequences.

An A&M trust is automatically created if there is any condition attached to a gift to, for example, Kate when she reaches the age of 18.In that example, the only advantage of inserting the condition would be to cover the position if Kate died before reaching her majority and being able to redirect the gift herself.

An infant cannot make a will, and thus on its death, any assets would pass in accordance with the intestacy provisions.When the child becomes entitled to income - but not necessarily to capital - the A&M trust will convert to an interest-in-possession trust.An alternative would be a bare trust to Kate (immediately).

This has enormous potential tax advantages.

The income would belong to Kate (but see below concerning gifts from parents) and Kate would also have her own annual CGT exemption.Income taxIf capital goes from a parent to an infant child earning more than £100 per tax year which is distributed, that income is aggregated with the income of the donor parent and will suffer tax at the parent's highest rate (section 660B ICTA 1988).

If the gift comes from grandparents, the child's personal income tax allowance would be available, possibly for income tax recovery, although from the next fiscal year, dividend tax credits will not be recoverable in these circumstances from next April.It is often said that a child is too young to receive capital at age 18.

A child may have a legal right to capital but few would be likely to enforce it.The investmentEven in the current climate with great uncertainty about equity investment and fears that deflation may reappear after a gap of more than 60 years, equity investment has historically favoured those who have taken a long-term view.

The longer the period for investment, the less the worry of comparatively short-term volatility.

Some of the more dire predictions are for deflation for the next 20 years.

In a deflationary period cash and debt increase in real terms and logic dictates that real assets would decrease in value.Nevertheless, where a company can show growth or an asset increase in value because of special demand, the basic expectation can be beaten even with deflation generally occurring.

Investment for a young child can take a very long-term view.

Some of the large international investment trusts continue to offer sound value.

Savings schemes are available for lump sums as small as £250.

Regular schemes can be set up for as little as £50 per month and stopped and started without finan cial penalty.

Infants cannot be shareholders but parents can hold as bare trustees for a child.

Remember, as with all investments, to consider the three basic fundamentals:- the costs being borne including any taxation;- historic and future performance;- the risk profile.

Advisers should also keep in mind that the fundamental objective is a real return, that is a return above inflation, and ideally above increases in national average earnings which historically have been about 2% per annum above inflation.

In a low inflation environment actual returns will fall but it is the real return which is important.

In this new environment quality debt will be more attractive as an asset and the real yield return differential between debt and equities will diminish - but not be abolished.

As always a sensible quality investment is likely to prove its worth.Remember too index-linked National Savings Certificates.

Even if there is deflation the real yield (currently 1.65% per annum) will always be given - unlike index-linked gilts.Conditional giftsInvestments are made with tax in mind.

The CGT difficulties of investing for children are best illustrated with three examples of gifts that could be contained in a will.

The same principles apply to lifetime gifts.

The examples are:(a) to Kate;(b) to Kate on reaching the age of 18;(c) to Kate on reaching the age of 21, on the assumptions that:(i) the testator dies when Kate is aged 4 and;(ii) section 31 of the Trustee Act 1925 applies in unamended form and;(iii) Kate is left a cash legacy which the personal representatives invest in shares, then each example has different CGT consequences.The wording in (a) creates a bare trust.

Kate becomes entitled to have the shares transferred into her name on reaching her majority, but CGT considerations arise for the personal representatives.

The wording in (b) creates an A&M settlement.At aged 18 Kate is again entitled to have the shares transferred to her.

A deemed CGT disposal arises (s.71 CGTA 1992) but as Kate was not absolutely entitled to income (because of the provisions of s.31 of the Trustees Act 1925) a CGT holdover relief will apply (s.260 (2)(d) TCGA 1992).In example (c) Kate becomes entitled to an interest in possession at the age of 18 (because of s.31 of the Trustee Act 1925).

On reaching the age of 21 a CGT deemed disposal arises but with no holdover relief available.

If s.31 of the Trustee Act was appropriately amended to keep open the power to accumulate income avoiding an interest in possession arising, the CGT holdover relief would be kept available.

There is a good precedent on this point in Butterworths' Wills Probate and Administration Service volume 1 form A3186.