Want to give money to your children?

Many parents and grandparents want to help their children financially, however, there are risks associated with this generosity.

To avoid inheritance tax, you have an annual gift allowance of £3,000 per donor and £250 per recipient (One year’s allowance can be carried forward). If the donor dies within seven years of the gift, IHT will be charged on anything over this amount.

If the recipient is under 18…

Parents or guardians can set up a Junior ISA (JISA) that grandparents can also pay into. This protects your money until the child reaches the age of 18. At that point, they can withdraw the funds or transfer it into an adult ISA.

The amount you can invest in a JISA increased on 6 April 2020 from £4,368 per year to £9,000.

You can choose between:

  • Cash JISA. This is the option that many people choose because interest rates can be in excess of 3%, and it’s not as volatile
  • Stocks and shares JISA. This is a missed opportunity because stock markets always outperform cash over the long-term – and we’re talking about a long-term investment here

Note that we recommend you invest in regular monthly instalments rather than occasional big lump sums, as this helps smooth out peaks and troughs in the stock market.

  • If you invest just £50 per month and get a 5% annual return, the JISA will grow to £19,367* after 18 years.
  • If you invest £100 per month, it will be worth £38,479*.
  • If you invest a total of £9,000 each year, it will grow to £288,594*.

(*Please note these figures are only illustrative and past performance is no guarantee to future performance).

This makes JISAs a great way to save for a young person’s uni fees, gap year, or to help them get a foothold on the property ladder.

If the recipient is over 18…

You could put money into an ISA for your adult children or grandchildren. However, they will have access so there is always a danger that they will withdraw it all and fritter away your hard-earned gift.

To avoid this, you could set up a Trust. This gives you control but it’s more complex to set up.

Another idea is to make a gift into their Pension. There are lots of benefits to this approach.

For one thing, they can’t access it until age 55. And, meanwhile, they don’t only get tax-free growth, they also get the bonus of tax relief.

If they are a minor or they pay income tax at the basic rate, and you give £1,000 into their pension, the government tops it up to £1,250.

If they pay income tax at the higher rate, they get the 25% uplift PLUS they can claim up to an extra 20%.

As a rough estimate, anyone who earns £50,000 or more pays higher rate tax on anything over £50,000. So, if they earn £51,000, they only pay higher rate tax on £1,000 and the rest of their income is taxed at the basic rate.

Further information

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As always, if you have any questions, please give us a call and we’ll be happy to help.

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100