Monday, 10 December 2018
With today’s kids likely to need thousands of pounds to get them through university and onto the property ladder, a Christmas gift that will help with some of these expenses is well worth considering.
If the investment is allowed to grow, it could build up into a sizeable sum. The money could then be given to the child as an adult. Depending on the amount invested, the capital may be enough to cover tuition fees and possibly board and lodging as well, or a deposit for their first property.
JUNIOR INDIVIDUAL SAVINGS ACCOUNT (JISAS)
A JISA is a tax-efficient children’s savings account where you can make contributions on the child’s behalf, subject to an annual limit. Any gains do not incur Capital Gains Tax and they will not be considered part of the parents’ or grandparents’ estate for Inheritance Tax purposes. Nevertheless, the child will automatically get access to the money when they turn 18 and can choose what to do with it.
A child’s parent or legal guardian must open the Junior ISA account on their behalf. Money in the account belongs to the child, but they can’t withdraw it until they turn 18, apart from in exceptional circumstances. They can, however, start managing their account on their own from age 16. The Junior ISA limit is £4,260 for the tax year 2018/19. If more than this is put into a Junior ISA, the excess is held in a savings account in trust for the child – it cannot be returned to the donor. Parents, friends and family can all save on behalf of the child as long as the total stays under the annual limit. No tax is payable on interest or investment gains.
When the child turns 18, their account is automatically rolled over into an adult ISA. They can also choose to take the money out and spend it how they like. This is a potential disadvantage of an ISA - you may be concerned that the child may not spend the money wisely - or you may not!
A pension is one of the greatest gifts you could give children this Christmas. Children’s pensions benefit from the same advantages as adult pensions. That means the pension fund benefits from the favorable tax treatment, in terms of tax relief on contributions along with the tax advantages of the fund. However, the child can't touch the money until age 57 at the earliest, so this isn't a gift that will help them get on the property ladder in their twenties.
For tax reasons, this approach may best be suited to grandparents. A grandparent can set up a designated account for a grandchild and invest a capital sum in it. The account remains under the full control and ownership of the grandparent, with any income and gains taxed as the grandparent’s own. When the grandparent deems appropriate, the account can be gifted or assigned to the child. Where this occurs, the grandchild is legally entitled to the money, as long as they have reached age 18. The transfer of ownership of the monies would be treated as a Potentially Exempt Transfer (PET) for Inheritance Tax purposesso the value of the gift will be outside the grandparent’s estate after seven years.
Many parents and grandparents want to set up their children or grandchildren to enjoy a secure financial future. Yet paying down student debt is not necessarily the best option if they have a spare capital sum to invest. They could also consider helping their children or grandchildren to save towards a deposit for a property or start a pension for them so that they have security in later life.
GIVE A FESTIVE FINANCIAL GIFT THIS CHRISTMAS
Time is a powerful ally of all investors, so where you are investing on behalf of children, you start with a great advantage – the power of compounding as profits are re-invested year on year. If you would like to discuss the options available to you, please contact us. We look forward to hearing from you.