Journal

‘A time for giving’…to the kids!

They say this is the time of year for giving, though for many parents giving to their children isn’t just confined to Christmas…it’s a lifelong hobby!

Naturally, parents and grandparents want to give their heirs the best possible start and support in life and this often has financial considerations – investing in a good education or helping them onto the property ladder being the most common.

Following several requests from clients – suggestions for blog topics are always very welcome – this month we look at effective ways to financially plan for your beneficiary’s futures and reduce your tax liabilities along the way…

 

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When deciding how best to financially assist your beneficiaries, what questions should you be asking yourself? Here are some to get you started:
  • How do I want to help their future? (i.e. the end goal)
  • How much money will be needed and when?
  • Which assets or resources can I allocate to this goal?
  • Do I want them to have any say or control over the money?
  • Am I looking to reduce my own tax liabilities as part of the plan?
Once you have a reasonably clear idea of what you’re trying to achieve, you should get a feel for the solution(s) that may suit best. These are outlined below under the headings of Regular Savings Plans and Lump Sum Investments.
 REGULAR SAVINGS PLANS 

If you have excess disposable income, you may want to consider allocating this to a savings plan that your beneficiaries can utilise at some point in the future.

From an Inheritance Tax perspective, provided the payments are made on a regular basis (monthly, quarterly or even yearly) and don’t compromise your own standard of living, they are likely to be treated as tax-exempt gifts i.e. a saving of 40% on each payment!

From a practical perspective, accumulating a pot through regular long-term savings means you won’t need to raid your own savings or investments when it’s time to pay education fees or a property deposit.

Some of the more common savings plan include:

1. Junior ISAs

You can invest up to £4,080 each tax year in Junior ISAs for children under the age of 18 and this fund will never pay income and capital gains tax.

These can invest in savings style accounts that earn interest (though rates are very low at present) or investment funds with varying degrees of risk offering higher potential returns over time.

Please note that children are able to control and access this fund when they reach the age of 18.

2. Unit Trusts

Should you be looking to invest more than the Junior ISA allowance every year, unit trusts are a good supplementary option. The fund is usually held in the name of the parent but the plan is designated to the child, which effectively makes this a form of trust.

This should keep the investment out of your estate for IHT purposes, though you should note that the beneficiary can legally access the fund from the age of 18.

3. Personal Pension Plans

For those who want to look after the longer term financial interests of their beneficiaries, investing in a pension plan can help put them on the road to a comfortable retirement.

The maximum that can be invested each tax year is £3,600 (or £300 per month). These payments are not just IHT-efficient, they will also benefit from basic rate tax relief.

For example, a £300 per month investment would in effect only cost you £240, as the government make up the £60 difference through tax relief. Easy money!

What’s more is that pension funds are free from income and capital gains tax in the same way as ISAs. The earliest the beneficiary can access the fund is age 55.

 LUMP SUM INVESTMENTS 

For those looking to make lump sum provisions, the solutions offer very similar benefits to regular savings, but depending on the circumstances, planning can be slightly more complex (fear not, I’m keeping this very brief!).

Most lump sum gifts or transfers over the £3,000 annual gift exemption will be subject to the 7 year rule (see below). This rule has a bearing on almost all lump sum investments for children:

1. Outright gifts

If your beneficiaries are already at an age where they need the money and you trust them use it wisely, keep it simple and gift the money to them outright.

In simple terms, live 7 years and the excess gift over £3,000 is outside of your estate. If death occurs between years 3 and 7 following the gift, then taper relief – where it applies – will reduce any IHT payable.

Outright gifts don’t require any legal administration. However, it’s worth making a note of the transaction somewhere in your financial files, as it will help your executors identify and calculate the IHT impact of any gifts.

2. Trust Investments

Many are familiar with the idea of trusts but it’s worth revisiting their potential uses and benefits:

Control – a trust allows you to retain control over who benefits from the trust fund, when they can benefit and how the lump sum is invested.
Tax – generally trust investments are treated in the same way as outright gifts. Therefore, provided you live the 7 years following inception of the trust, the fund and any growth achieved will be outside of your estate for IHT purposes (taper relief may also be available).
Income – certain trusts allow you to draw an income from the fund and others even allow access to the capital itself.
Administration – like any important financial arrangement, trusts require some ongoing management, but the perceived work and complexity is often grossly over-stated.
In fact, some of this work can be reduced quite easily if you set things up in the right way. For example, if the trust fund invests in vehicles such as Investment Bonds (also known as a life assurance bond), the trustees aren’t required to submit an annual tax return, which saves you both time and cost.

3. Property

If you haven’t done any prior planning and simply give your beneficiaries money towards a deposit for a home, this is treated as an outright gift.

For those wanting to get in on some early property action, you could consider purchasing a rental property for your beneficiaries while they’re young.

This could mean buying an investment property outright in your own name and later transferring ownership to the beneficiaries when you feel the time is right.

Alternatively, you could purchase the property via a trust, so that you can retain more control over the asset.

Either way, there can be a complex web of considerations here (capital gains, income tax, stamp duty and gifting rules), so taking legal and even tax advice is imperative.

It’s probably also worth noting that property is an increasingly more expensive and tax inefficient asset to own, particularly within a trust structure.

 And finally… 

This hopefully gives you plenty of food for thought and something to mull over the festive period (pun intended), so please don’t hesitate to get in touch if you need further information or advice.

As this is my final blogpost of 2016, I’d like to take the opportunity to personally thank you for your continued support and custom.

I’m also very grateful to those who provide valuable feedback on these posts. It’s most comforting to know these do actually get read….and sometimes even to the end!

Wishing you a Merry Christmas and a happy and healthy 2017.

Thanks for reading.

Simon Ben-Nathan

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