Giving money to younger generations – what are the options?

The financial pressure on younger generations isn’t letting up, is it? Sky-high education and housing costs were enough of a challenge before today’s onslaught of tearaway inflation, rising interest rates, cost-of-living hikes, diminishing tax allowances and recession. Up against all of this, it’s not surprising that financial gifts from older generations have become an important lifeline. But what’s the best way to go about gifting money to family so you don’t leave yourself short, trigger a tax bill or cause other unexpected consequences? This article can help you.

This question is often the blocker on giving your money away because, when you don’t know what the future will hold, how do you judge if you can afford it? Perhaps surprisingly, it’s quite a simple question to answer using what’s known as cashflow modelling. This is a sophisticated piece of kit that financial planners use to help their clients make plans and manage their money. You can try out different scenarios and stress test your finances by simulating different events such as a stock market crash or paying for later life care. Cashflow modelling can give you confidence in gifting money without running out yourself.

The rules are really clear when it comes to cash gifts and tax. You can give and receive cash without paying tax but if you die within seven years of making a cash gift there may be inheritance tax to pay. There are also a number of exemptions that allow you to make financial gifts without worrying about inheritance tax:

• Each year you have a £3,000 allowance for making gifts and this can be carried forward for one tax year if it is not used meaning you could gift £6,000. This can be broken down into smaller gifts for multiple people.
• There are also certain gifts that can be made without triggering inheritance tax, for example wedding or civil ceremony gifts up to a certain value, small gifts of £250 per person and regular gifts from your excess income.

If you want to save or invest for a child, there are a number of different ways to do this and the right one depends on individual circumstances.  For example, how much are you giving? How much control do you want and what age do you want the child to have the money?

Junior ISAs

These are an incredibly simple account that allow you to save or invest for a child tax free. A parent or guardian has to set up the account but anyone can pay in. Watch out for a couple of restrictions: you can only pay in £9,000 each tax year and the child can’t get access to the money until they’re 18. This makes Junior ISAs excellent for building a nest egg but not great if you want the money to go towards childhood expenses.

Designated accounts

Another simple option is to open a designated account for a child. There are no restrictions on who can open one or pay into it and you can contribute as much as you want and get at the money at any point. Unlike Junior ISAs, there is tax to pay with designated accounts but if they are set up by someone other than the parent, the child’s tax allowances can be used to mitigate some or all of the liability.

Trusts

From simple bare trusts to discretionary trusts, these give you the opportunity to save bigger sums than you can in a Junior ISA and also retain more control, There are many different trusts and each has a different purpose and tax rules.

Pensions

This is a really long-term option because the child won’t get their hands on the money until they’re in their 50s, but if you’re in a position to invest into a pension for a child, it could be a gamechanger for them. The incredibly long time horizon means that even small sums should benefit from the power of compounding over the years. You can contribute £2,880 a year into a pension on behalf of a child.

We are helping lots of clients give a financial helping hand to younger generations – from their grown-up children through to newborns and even future children. Why not have a chat to see how we can help you? We offer free initial consultations to give you the opportunity to talk through your circumstances with one of our experienced financial planners. You can book online or call us on 020 7189 2400.