If you have children, you’re probably considering if you should pass on some of your wealth to them now, rather than wait until they inherit everything. Figures show that the next generation stands to inherit more than £293bn overall, but that on average, children and grandchildren can look forward to an early windfall of nearly £9,500 each.
So gifting some money to your children could be a great idea. Especially if they’re trying to get on the housing ladder, are struggling with debt or could just do with a bit of help to enjoy a family holiday or buy a new car. But before you jump in, there are some important things to consider – not least, any tax implications that passing over your money might bring.
1. Annual exemption
Each tax year you’re allowed to give someone up to £3,000 tax-free. And if you didn’t use your annual exemption in the previous tax year, you could pass on double that. However, you can only carry forward the exemption for one year and can’t go back any further.
2. Wedding gifts
If your child is planning their big day, each parent can gift up to £5,000 towards a wedding, totally tax-free. And grandparents can do that too – but only for an amount up to £2,500.
3. Higher cash gifts
If you give your children any other chunks of money above the annual exemption limit, they are seen as ‘potentially exempt transfers’. What that means is that if you live for seven years after giving the money, it is tax-free. But should you die within that time frame, it will be taxable depending on how many years before it was gifted. For example, six to seven years before you’d be looking at 8% tax, but if it’s less than three years, you’re looking at a 40% tax bill.
4. Put money into an ISA or premium bond
If your children are under 18, you could consider putting money into a Junior ISA for them. In the 2021-2022 tax year, you’d be able to pay in a maximum of £9,000 without paying any tax on it. Or go for premium bonds. These don’t pay interest, but monthly prizes worth up to £1m are paid out each month – and they’re tax-free.
5. Start a pension
Parents and legal guardians can set up a pension for their child and can pay in a maximum of £2,880 a year, which the government will top up to £3,600 thanks to tax relief. It may seem like a long way off, but it’s one of the most tax-efficient ways to save for the future. And even a small savings pot will grow into a significant amount when left for a long time.
Of course, this is just the start of ways you can pass money onto your child. You may also want to consider setting up investments for them – particularly ones that adhere to Environmental, Social and Governance (ESG) principles. Then you’ll be making a difference to the future of the planet as well as your child.
If you want to talk to us about setting up investments, trusts or pensions for your children – or want to know exactly where you stand in terms of Inheritance Tax, please feel free to give us a call on 01372 365950.