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Bright Futures: Nurture your children and grandchildren’s wealth and save on tax at the same time

| Tax | By Tom Stephenson

If you’re keen to pass wealth to your children, grandchildren or great grandchildren to support your family goals and direction in life, where do you start? What would be the future implications of any actions you took today, if any? While many of our clients ask for advice on this subject, first things first...

Spending time looking at the options available can pay dividends later in life, so over the next few months, that’s what we’ll be doing.

Horses for courses.

Life would be pretty dull if we were all the same and maximising wealth would be too. Different solutions suit different circumstances and gifting is just one. You could for example gift £100,000 to your child, but if they, together with a spouse, already own assets over £650,000*, you’ll inadvertently increase their Inheritance Tax liability (and if you didn’t know, Inheritance Tax weighs down at a whopping 40%). This could leave loved ones out of pocket further down the line.

If there are grandchildren in the picture, gifting directly to them could be a viable alternative and beneficial to both you and the child.

Gifting of assets is also an option, it needn’t just be money. For example, could you pass your property to your children to cut your tax bill?

If one objective in passing down wealth would be to mitigate your own Inheritance Tax liability, be mindful that most gifts would need to have been made no less than seven years before your own death. Thinking and planning with the bigger picture in mind is therefore important.

With the future in mind…

Here’s a summary of the options we’ll cover in this series:

  1. Junior ISA (or JISA)
    A JISA could be a tax-efficient way to help build savings for anyone in your family aged up to 18.
  2. Bare Trusts
    Funds invested and managed on your behalf. Parents (or grandparents) act as the trustee and the child is the beneficiary. This is a potential solution where you would have complete control of all investments until the child reaches 18, at which point they’ll have the right to use the investments in any way they please.
  3. Stakeholder / Pensions
    Potentially a long term option depending on the age of the child(ren). Investing in a pension for younger generations in your family could help mitigate tax against your own assets while building up savings for your children (or grandchildren) with tax-efficient growth opportunities. A key restriction is that any savings built up in the pension cannot be accessed by the child until they’re at least 55.
  4. Cash Savings/ NS&I and the pitfalls of use when inflation erodes returns
    Low risk, meaning less potential benefits, but youngsters would be free to manage their account from age seven, which offers a good learning curve for them to become financially conscious early on in life. There are potential greater benefits if used alongside another investment vehicle.
  5. Investment Portfolios – designating the Portfolios
    Investments in your name which allow you total control until all assets are distributed at your discretion. If as the donor you live for seven or more years after distribution of the assets, they will be exempt from Inheritance Tax.

If at this point you feel that any of the above options might be worth exploring (or relevant to a family member or friend’s circumstances), please speak to your adviser or get in touch. While we’ll be covering these options in more detail from a general view, by understanding your particular goals and circumstances we can be specific with our advice and after all, time is precious.

Tom Stephenson BSc (Hons) DipFA

Adviser

*£650,000 is the 2018/19 tax year allowance for married couples and civil partners (£325,000 per individual) before any assets in the deceased’s estate become subject to Inheritance Tax. If one spouse dies, the allowance would be transferrable to the remaining spouse.

Warning - Tax treatment depends on individual circumstances and may be subject to change in the future.

Warning – the views expressed by Courtiers in this summary and any video and video transcripts, are reached from our own research. Courtiers cannot accept responsibility for any decisions taken as a result of reading this document, watching the featured video or reading the video transcript and investors are recommended to take independent professional advice before effecting transactions. The price of stocks, shares and funds, and the income from them, may fall as well as rise. Past performance is not necessarily a guide to future returns.

We do not endorse nor accept responsibility for the content of any website not operated by Courtiers which you may visit by following a link from this article.

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