How to give your kids a financial “head start” – 5 tax-efficient gifts for Christmas | Personal finance | Finance
Savings products might not be the first thing that comes to mind for parents when planning their Christmas shopping lists, but Jason Hollands, chief executive of Bestinvest, says it was now. the best time to give gifts that contribute to the financial well-being of the next generation. .
While handing money over to younger generations might seem like the most obvious option, it can still offer surprisingly generous tax incentives. More specifically, this would concern inheritance rights.
Mr Hollands explained: “In theory, you can give as much as you want – as long as you don’t die within seven years, in which case inheritance tax rules come into play. If the value of your estate exceeds £325,000 at death, amounts above this could potentially result in a tax liability to be paid by your beneficiaries – including those who have received a financial gift from you, unless covered by the one of many exemptions, such as the “seven-year” rule.
“Cash donations can be made each year up to £3,000 without any tax concerns – and the previous year’s allocation can be carried over so that £6,000 can be donated without any future IHT debt. plus a small gift allowance of £250 per recipient.”
Mr Holland’s added that ‘of course the ‘problem’ with money is that the lucky recipient can do with it what they want. Although in the case of younger children and larger amounts, the parents usually sequester the gift”.
For those who wish to retain a little more control over giving or focus on longer-term planning, ISAs may prove to be a better option.
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For younger children, junior ISAs may be the best option for tax-conscious family members. These accounts also limit how children can receive the funds, preventing impulse buying or reckless spending.
Mr Hollands continued: “These are accounts which can be opened by parents on behalf of children and allow up to £9,000 to be saved or invested (in the current tax year) with all returns tax exempt.
“The funds are not accessible until the child turns 18, at which time the JISA converts to an adult ISA. Withdrawals can then be made to help with things like buying a car, university fees or left invested and later used for a property deposit.
“With savings rates on the best JISAs around 2% and inflation currently at 4.2% and above, those willing to take a little risk with an invested version could reap much higher returns.
“A child receiving just £50 a month in a JISA investment who earned 5% a year over 18 years would have a pot at the end worth £17,655, out of a total contribution of £10,800. From the same amount invested, the two percent savings JISA would result in a pot of £13,080. Meanwhile, they can see the pot grow and understand the power of compounding. All of this could have the added benefit of instilling the financial sense and the habit of saving.
Those looking to gift money to older family members can look to Adult ISAs or Lifetime ISAs instead. Mr. Hollands explained the difference between these products and the comparison of their tax advantages.
He said: “A lot of times people want to help their young adult parents pay off their college debt or kickstart their savings for a deposit on a property. That’s where adult ISAs and LISAs come in handy.
“Only the account holder can open them, but the promise of money to deposit is often compelling. Savers aged 18-39 can deposit up to £4,000 a year into an investment or cash LISA, and the government will top it up by 25%.That’s up to £1,000 of ‘free money’ a year.
“But the condition is that the pot must be used either to buy your first property (capped at £450,000) or to save until you are at least 60. Withdrawals before age 60, other only for a first real estate purchase, will be subject to a penalty of 25% because the State supplements are recovered.
“If more flexibility is needed, an ISA is a better option. An annual cash gift could be conditional on opening an ISA, in the hopes that it inspires the recipient to contribute to it themselves. that they don’t provide the initial top-ups, all returns are tax-free and the value of these tax benefits accumulates over time as the prize pool grows in value.”
Pensions and trusts
An early childhood boarding house might not get much praise from children, but Mr Hollands said parents would be thanked profusely when their children grow up and see what a head start they have had for their overall wealth.
There are also specific benefits you can take advantage of when pensions are prioritized from an early age.
Mr Hollands noted: “Children have an annual gross retirement allowance of £3,600 and contributions are subject to a 20 per cent tax relief, although most pay no tax. So that means a parent or a grandparent can invest up to £2,880, which would then be topped up by the state of £720. This is effectively free money.
“As with all pensions, the returns are tax-free – but of course the beneficiary would not be able to access the pot until the retirement freedom age, which is currently 55 but is due to rise to 57. in April 2028.
“However, the frustrations of not being able to touch the gift should be outweighed by very visible returns. Even if half of the £2,880 was given annually to a child from birth to 18, with state top-ups and annual returns of five per cent – this would translate to a pot of £473,435 at age 60. This comes from a total donation of a relative acorn-sized amount of £25,920.
Trusts are also viable choices for long-term planning and Hollands concluded by looking at the different options available.
He said: “A trust is a legal arrangement that allows a person, such as a parent or grandparent, to hold an asset as a ‘trustee’ for the benefit of someone else, that is- i.e. a child. A relatively simple version is a “naked trust”. “, which is held for a child until the age of 18 in the name of a trustee. The child is entitled to all income and gains of the trust, and these are taxed as if they belonged also to the child – which should result in little or no tax.
“Unlike a JISA, there are no limits on the amount one can put into a simple trust and the money can be accessed anytime before the child turns 18 as long as it is for their benefit Parents can run into income tax liabilities by using bare trusts so they are a more popular tool for other family members All trusts can be complicated, and For those considering setting up a trust with larger sums of money or multiple beneficiaries, it may be helpful to consult with a financial planner.