1. Save on their behalf
Saving some money on their behalf might not be the most exciting gift a child will ever receive, but in years to come, they may well be grateful for such a present.
One place to start is by maximising a child’s Junior ISA contribution. Up to £4,368 can be invested into a Junior ISA before the end of this tax year, as long as the child was born after 3 January 2011 (or before 31 August 2002).
Both Cash and Stocks and Shares Junior ISAs are available, depending on an individual’s risk profile and how long they are looking to set the money aside for. Any income and investment returns are tax-free.
With a Cash ISA, the investment is safe if the account is covered by the Financial Services Compensation Scheme (up to £85,000 per brand/institution). Investment Manager Rachel Springall, from financial analysts Moneyfacts, also points to the interest available, saying: “Rates on Junior ISAs are better than those on other children’s savings accounts.”
Note that only a parent can open a Junior ISA on a child’s behalf; a grandparent cannot. Grandparents can, however, make contributions to the account.
Relatives can also buy Premium Bonds on behalf of children under the age of 16. The minimum investment is now just £25, and all prizes are free of Income and Capital Gains Tax.
Until the child’s 16th birthday the parent or guardian nominated on the application looks after the Bonds, regardless of who buys them. so, while the odds of winning a prize are 24,500 to 1, it’s a government-backed scheme and so money invested is 100% secure.
Children’s savings accounts offered by banks and building societies often offer more generous rates than other similar products. So, while the returns may not be spectacular at the moment, investors are protected by the Financial Services Compensation Scheme. Additionally, it can encourage children to develop a savings habit by taking their pocket or birthday money into the bank regularly.
2. Set up a pension for them
For parents and grandparents looking to save for the long term, gifting money into a child’s pension can be a way of growing their cash.
Up to £2,880 can be contributed into an under-18’s personal pension each tax year, and with the 20% tax relief added, the total contribution is £3,600. The child will be able to access the pension at normal retirement age, which will be age 57 from 2028.
At 5% net growth (after charges), a single contribution of £3,600 would be worth more than £58,000 in 57 years’ time (according to Morningstar).
There is a wide choice of pensions available for children, including a SIPP where a parent or legal guardian manages the account, and makes any investment decisions, until the child turns 18.
For parents and grandparents who have adult children, it is still possible to make pension contributions. Indeed, these contributions are treated as if they had been made by the recipient and the parent or grandparent won’t benefit from the tax relief themselves.
For example, if a parent pays £400 into their child’s personal pension, the child receives basic rate tax relief on the contribution, taking the total amount invested to £500. There are also additional benefits to the child:
- If the child is a higher rate taxpayer, they can claim higher rate relief on the parent’s contribution. This is done through the annual tax return process and reduces the tax bill of the recipient.
- If the child is affected by the high-income child benefit charge and earns between £50,000 and £60,000 (or slightly above), the money a parent contributes is deducted from their income before the high-income child benefit charge is worked out, therefore reducing their tax liability.
From a parent or grandparent’s perspective, contributions may reduce future Inheritance Tax bills if they qualify for one of the standard exemptions. This brings us nicely onto the next type of gift.
3. Give gifts from income
For individuals looking to reduce the value of their estate for Inheritance Tax (IHT) purposes, gifting is one solution.
One of the most valuable IHT exemptions is the ‘gifts from income’ exemption. Here, an individual can make gifts out of their income, as long as these gifts:
- Are regular (form part of the donor’s usual expenditure)
- Come from the donor’s surplus income. HMRC consider this to be ‘income after tax and normal outgoings’
- Do not adversely affect the donor’s standard of living.
Examples of gifts from income may be payments to a life assurance policy or contributions to a child’s pension, as detailed above.
Making these gifts on at least an annual basis is crucial so that an individual can demonstrate that they are regular and are made from their ‘normal’ income.
As the claim for the ‘gifts from income’ exemption is made on death, it is important to keep clear records. The form IHT 403 incorporates a schedule which can be used to substantiate the claim and completing this on an annual basis with supporting documentation can help to claim this exemption.
To discuss your gifting strategy of Inheritance Tax concerns, contact us for an initial discussion.
This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.
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