Savings products may not be the first thing parents think of when planning their Christmas shopping lists, but Jason Hollands, Managing Director of Bestinvest, argued that now is the best time to give gifts for the financial well-being of the next Generation contribute.
While handing over cash to younger generations may seem like the most obvious option, it can nonetheless offer surprisingly generous tax incentives. Specifically, this would affect inheritance tax.
Mr. Hollands stated, “In theory, you can donate as much as you want – as long as you don’t die within seven years, inheritance tax rules come into play. If the value of your estate exceeds £ 325,000 at the time of death, any amounts above it may result in a tax charge payable by your beneficiaries – including those who have received a financial gift from you, unless otherwise covered one of several exceptions. like the “seven year rule”.
“Monetary gifts can be given up to £ 3,000 annually without any tax concerns – and the previous year’s grant can be carried over so that £ 6,000 can be given free of future IHT liabilities. This comes on top of a small gift certificate of £ 250 per recipient. “
Mr. Holland added: “Of course the ‘problem’ is with cash – the lucky recipient can do whatever they want with it. Even if the parents usually confiscate the gift with younger children and larger amounts. “
For those looking to keep a bit more control over the gift or focus on more long-term planning, ISAs may prove to be a better option.
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For younger children, junior ISAs can be the best option for tax-conscious family members. These accounts also restrict how children can receive the money, preventing impulse buying or reckless spending.
Mr Hollands continued, “These are accounts that parents can open on behalf of children and that allow up to £ 9,000 to be saved (for the current tax year) or to invest with any tax-free income.
“Funds cannot be accessed until the child is 18 years old, at which point the JISA will be converted into an ISA for adults. Withdrawals can then be made to support things like buying a car, paying for tuition, or keeping it invested and later using it on a property deposit.
“With savings rates in the better JISAs of around two percent and an inflation rate of currently 4.2 percent and more, those willing to take a little risk with an invested version could achieve much higher returns.
“A child who receives just £ 50 a month in a JISA investment that has made five percent pa over 18 years would end up with a pot worth £ 17,655 for a total contribution of £ 10,800. For the same amount, JISA’s two percent savings would add up to a pot of £ 13,080. During this time, they can watch the pot grow and understand the power of compound returns. All of this could have the added benefit of stimulating financial understanding and the habit of saving. “
Those looking to give money to more older family members can turn to adult or lifetime ISAs instead. Mr. Hollands has broken down the difference between these products and comparing their tax benefits.
He said, “Often times, people want to help young adult relatives with their college debts or to get their savings on property for bail. This is where ISAs and LISAs for adults come into play.
“Only the account holder can open this, but the promise to deposit cash is often convincing. Savers between the ages of 18 and 39 can deposit up to £ 4,000 per year in an investment or cash LISA and the government will top it up by 25 percent. That’s up to £ 1,000 in “free cash” a year.
“But the condition is that the pot must either be used to buy your first property (up to a maximum value of £ 450,000) or to save until you are at least 60 years old. Withdrawals before 60 will be penalized with a 25 percent penalty as government charges will be reclaimed.
“When more flexibility is required, an ISA is a better option. An annual cash gift could be tied to opening an ISA in the hope that it inspires the recipient to contribute themselves. While they do not offer an upfront top-up, all returns are tax-free and the value of these tax benefits increases over time as the pot increases in value. “
Pensions and Trusts
Early retirement may not receive much praise from children, but Mr Hollands assured us that parents will be thanked in abundance as their children grow up and see the head start they have on their overall fortune.
There are also special benefits that you can take advantage of when prioritizing pensions from an early age.
Commented Mr Hollands: “Children have a gross annual pension of £ 3,600 and the contributions are subject to a 20 per cent tax break, although most of them do not pay tax. This means that a parent or grandparent can invest up to £ 2,880, which is then topped up by the state by £ 720. It is effectively free money.
“As with all pensions, the returns are tax-free – but of course the recipient could only access the pot when the retirement age is 55, which is expected to increase to 57 in April 2028.
“However, the frustrations of not being able to touch the gift should be offset by the very visible returns. Even if half of the £ 2,880 each year is given to a child from birth to the 18th of the relatively acorn-sized amount of £ 25,920. “
Trusts are also workable choices for long-term planning, and Me Hollands concluded by considering the various options available.
He said: “A trust is a legal arrangement that allows an asset to be held by someone such as a parent or grandparent as a ‘trustee’ in favor of another person, e.g. B. a child to hold. A relatively simple variant is the “bare trust”, which is run in the name of a trustee for a child up to the age of 18. The child is entitled to all income and gains from the trust, and these are taxed as if they belong to the child – which should result in little or no tax.
“Unlike a JISA, there are no restrictions on how much you can invest in a bare trust and the money can be withdrawn anytime before the child is 18 as long as it benefits them. Parents can run income tax debts with bare trusts, making them a more popular tool for other family members. All trusts can be complicated, and for those considering starting a trust with large amounts of cash or multiple beneficiaries, it may be worth consulting a financial planner. “
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