An early savings or pensions headstart can make the best present of all. Discover the tax-friendly financial gifts you can give young relatives.
Published on 09 Dec 20216 minute read
Written by Jason Hollands
In a festive season where supply chain crises and material shortages threaten the availability of many ‘must have presents’ for children and other young family members, gifts that contribute to their financial well-being are all the more attractive.
It could also be argued that by not adding to the pile of plastic and tech presents, this is the sustainable – not to mention fiscally responsible - option for giving to younger relatives.
In years gone by, Premium Bonds were a popular option for friends and family to bestow on youngsters. But along with other savings accounts, the returns on these have dwindled to negligible – and after inflation negative – amounts. When it comes to gifts of cash, you must consider the potential tax implications of your generosity.
We have spelled out some of the options for tax-friendly financial gifting.
In theory, you can give as much as you like – as long as you don’t die within seven years, in which case inheritance tax rules come into play. If the value of your estate exceeds £325,000 at death, then amounts over this could potentially attract a tax-charge payable by your beneficiaries – including those who have received a financial gift from you unless they are covered by one of a number of exemptions, such as the ‘seven year’ rule.
Cash gifts can be made annually up to £3,000 without any tax worries at all – and the previous year’s allowance can carry over so £6,000 could be gifted free from future Inheritance Tax liabilities. This is in addition to a small gift allowance of £250 per recipient.
Of course the “problem” with cash is – the lucky recipient can do with it what they like. Even if in the case of younger children, and larger amounts, parents typically sequester the gift.
These are accounts that can be opened by parents on behalf of children and allow up to £9,000 (in the current tax year) to be saved or invested with all returns free from tax.
Funds cannot be accessed until the child is 18, at which point the Junior ISA converts to an adult ISA. Withdrawals can then be made to help with things like buying a car, university costs or left invested and used later for a property deposit.
With savings rates on the better Junior ISAs around 2%, and inflation currently running at 4.2% and upward, those willing to take a bit of risk with an invested version could reap much higher returns.
A child receiving just £50 a month in an investment Junior ISA that earned 5% per annum, over 18 years would have a pot at the end worth £17,655, from a total contribution of £10,800. The same amount put in to a 2% savings Junior ISA would result in a pot of £13,080.
In that time, they can watch the pot grow, and understand the power of compounded returns. All of which could have the additional benefit of instilling financial sense and the savings habit.
Be aware that a child can only have one Junior ISA and if they already own a Child Trust Fund, a predecessor of the Junior ISA, they are not eligible for a Junior ISA as well.
You should always bear in mind, though, that investments go down as well as up and you may not get back the amount invested.
They might not thank you at age 12 for this one, but they will do in later life when they see what a headstart it gave to their overall wealth.
Children have an annual gross pension allowance of £3,600 and contributions are subject to 20% tax relief, even though most do not pay any tax. So that means a parent or grandparent can invest up to £2,880 which would then be topped up by the state by £720. It’s effectively free money.
As with all pensions, returns are free from tax – but of course the recipient would not be able to access the pot until pension freedom age, which is currently 55 but is set to rise 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 the £2,880 was gifted each year to a child from birth to 18 years, with the state top-ups and annual returns of 5% - that would result in a pot of £473,435 by age 60.
That’s from a total gift of the relatively speaking acorn-sized amount of £25,920.
A trust is a legal arrangement that enables an asset to be held by someone, such as parent or grandparent, as the ‘trustee’ for the benefit of someone else i.e. a child. A relatively simple version is a ‘bare trust’, which is held for a child until age 18 in the name of a trustee. The child has the right to all the income and gains from the trust, and these are taxed as if they belong to the child too – which should result in little or no tax.
Unlike a Junior ISA, there are no limits on how much one can put into a bare trust and the money can be accessed at any time before the child is 18 as long as it is for the benefit of them. Parents can run into income tax liabilities using bare trusts so they are a more popular tool for other family members.
Be aware that all trusts can be complicated, and for those thinking about establishing a trust with larger amounts of cash or multiple beneficiaries it might be worth a consultation with a financial planner.
Often people want to help out young adult relatives with their debts, or to kick off their saving for a deposit on a property. This is where ISAs come in handy. Only the account holder can open this but the promise of cash to deposit is often persuasive.
An annual cash gift could be conditional on the opening of an ISA, with the hope that it inspires the recipient to contribute to it themselves. While they don’t provide upfront top-ups, all returns are tax-free and the value of these tax benefits build over time as the pot grows in value.
Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.