For many of us, our financial goals are tied in with having a happy home and fulfilling family life.
For a parent, there’s no greater goal than providing for a child and your investments are one of the key ways you can ensure that the next generation’s future is a bright one.
This article will help you to consider what you can do for your children, including investment products, property, gifting money and setting up beneficiaries.
Open a Junior ISA for your child.
A Junior ISA is a tax-efficient way to invest up to £9,000 each year for each child you are a parent or guardian to. You won’t pay Income Tax or Capital Gains Tax on the money inside the Junior ISA, no matter how much it grows.
You remain in control of the investment until your child reaches their 16th birthday, at which point the money belongs to them. However, they cannot withdraw funds until their 18th birthday.
Junior ISAs can be a great educational tool for your child in terms of introducing them to the world of investing, budgeting and general financial knowledge. Opening the conversation about good financial management at a younger age can better prepare your child to take on the responsibility of their Junior ISA.
Anyone you know can add to the Junior ISA, making it a useful account for investing gifts for a child’s future – for example from grandparents or extended family.
In the 2024 to 2025 tax year, the savings limit for Junior ISAs is £9,000.
Invest in a Junior Pension.
By investing early in life for a Junior Pension, it can bring long-term returns for a child as the impact of compounding is seen for a longer period. It’s also a tax-efficient account as returns aren’t subject to Income or Capital Gains Tax whilst invested within the Pension.
A Pension for an under 18 has two main benefits over a Junior ISA: (1)
- Contributions attract up to 20% tax relief
- The child cannot access their money until 57 – meaning it can be used for helping them to achieve their long-term goals
The True Potential Junior Pension benefits from an Annual Allowance of £3,600 in the 2024/25 tax year and contributions will attract tax relief.
For example, you can add £2,880 into a child’s Junior Pension in this tax year and the government will add in £720 – representing 20% in tax relief. With investing, capital is at risk.
Leaving your house to your children.
You can leave your residential home to your children; however, you need to be mindful of Inheritance Tax and when it applies. As a starting point, the ‘nil-rate band’ (NRB) is the amount up to which an estate has no Inheritance Tax to pay. Each individual has their own nil-rate band which is £325,000 for the 2024/25 tax year.
Any part of the estate up to the NRB threshold is chargeable to Inheritance Tax at a rate of 0%. Any part of the estate that exceeds the NRB threshold is usually chargeable to Inheritance Tax on death at 40%.
There is also an additional threshold called the ‘residence nil-rate band’ (RNRB). This is available when eligible residential property is left to direct descendants and provides an extra tax-free allowance of up to £175,000 on top of the £325,000 nil-rate band.
Taking both bands together means that you have a potential tax-free threshold of up to £500,000 – or up to £1 million as a married couple (including civil partners) – that you can leave to your child tax-free.
The ‘main residence nil-rate band’ cannot be used with lifetime gifts.
*Rates sourced from gov.uk: https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band
What is the seven-year rule for Inheritance Tax?
The seven-year rule still applies if you give a property away before you die. This is where no tax is due on any gifts you give if you live for seven years after giving them, unless the gift is part of a trust.
If you want to continue living in your property after giving it away, you’ll need to:
- Pay rent to the new owner at the going rate
- Pay your share of the bills
- Live there for at least seven years
Otherwise it counts as a ‘gift with reservation’ and will be added to the value of your estate when you die.
*Sourced from gov.uk and accessed on 30/07/24
Gifting to your children in a tax-efficient way.
What counts as a gift?
A gift is anything of value that you give to someone else, including money, property, and physical possessions. It could also include stocks listed on the London Stock Exchange and unlisted shares you held for less than two years before your death.
Giving cash gifts to children.
Each tax year, you can also give away some money free of Inheritance Tax. When it comes to children, it’s not only how much money you can give them, but also when you give it that matters.
In the 2024/25 tax year, you’re entitled to an annual tax-free gift allowance of £3,000 – this is also known as your ‘annual exemption’. With your annual gift allowance, you can give away money to your children up to that total without it being added to the value of your estate. You can give up to £3,000 to one child or split the total between several children.
If you exceed the annual gift allowance in any one tax year, you’ll need to live for more than seven years after making your gift to avoid it being included in the value of your estate (2) – and also potentially liable to Inheritance Tax.
*Rules on gifting tax free sourced from: https://www.gov.uk/inheritance-tax/gifts
Gifts in consideration of marriage or civil partnership.
You can also give cash gifts of up to £5,000 to a child for weddings or civil partnerships, free of Inheritance Tax.
Name a beneficiary and protect your financial legacy.
A beneficiary is the person you name to receive some or all of the money remaining in your Pension upon your death. You can name as many beneficiaries as you wish and choose the percentage you’d like them to inherit.
Your Pension is left to your beneficiary through your Expression of Wish. Your Pension sits outside of your estate, meaning your beneficiary won’t normally pay any inheritance tax on the money inherited through your Pension.
It’s important to think about the people closest to you and those who you would trust with your financial legacy. Typically, this may be your children, known as your dependents, but it could be anyone you choose. You can also name charities and trusts on your expression of wish, as well as beneficiaries.
When you pass, your beneficiary can choose to take the remaining value as a lump sum or choose to leave your money invested in the Pension. There is the potential for the Pension pot to grow in value – extending your financial legacy into the future. However, it’s always worth remembering that the value of an investment can go down as well as up and you could get back less than you invested.
Adding a Pension beneficiary.
With True Potential, you can update your Expression of Wish by simply logging into your True Potential app or online account, selecting your Pension, viewing full details, and selecting Edit on the Expression of Wish section. You can then provide the name and contact details for your chosen Pension beneficiary or you can add a trust of charity.
If you are in any doubt or want to make sure your beneficiaries are named correctly it could be worth speaking to a financial adviser. They’ll be able to assist with your beneficiaries and ensure your Pension is best suited to being tax efficient and appropriate to your goals.
Protecting your family legacy with True Potential.
We’re always here to help you do more with your money. Professional expertise will help you to decide upon a course of action that is best suited to your unique circumstances.
If you’re a True Potential client and would like further support with investments, you can also call our Relationship Management team on 0191 500 9164. They’re available 7am – 8pm weekdays and 8am – 12pm on Saturdays.
If you’re not a client, you can call one of our experts on 0191 625 0350 to learn more.
[disclaimer]With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors.
Tax is subject to an individual’s personal circumstances and tax rules can change at any time.
ISA eligibility and tax rules apply. The maximum amount you can put into a JISA in the 2024/2025 tax year is £9,000.
Pension eligibility and tax rules apply. The Junior Pension allowance for the 2024/25 tax year is £3,600. This includes any tax relief added by the government. This blog is not personal financial advice.[/disclaimer]
Sources
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