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Gifting Assets to your Children in a Tax Efficient Way

As we continue to battle the cost-of-living crisis, house prices and mortgage rates are continuing to remain high. Naturally, parents and grandparents want to help where they can, be that supporting with the costs of further education, weddings or house purchases.

A common approach for many is to leave gifts to loved ones in their Will.  But, as we are now living longer than ever, these gestures, albeit thoughtful, may not come at a time when they are most required. It may therefore be beneficial to consider gifting money to your children and grandchildren throughout your lifetime.

Gifting money to family can be simple and effective; but you should consider the following:

Firstly, ask yourself the question, can I afford to give away money to my family right now? It is important to ensure that your current standard of living as well as your future long-term plans are not compromised.

Secondly, consider the type of gift which may suit you and your family’s circumstances. It could be a lump sum that is required imminently. Or regular contributions that could be invested for the long term – there are lots of options and products to consider.

Thirdly, ensure you understand the tax consequences involved.  No one wants to end up with an unwanted and unexpected tax liability.

Finally, it is important to recognise that gifts of a substantial size, or gifts made within seven years of your death, could give rise to an Inheritance Tax liability.

You do however have several gifting allowances available to you on an annual basis which are exempt from Inheritance Tax. These include:

  • an Annual Allowance of £3,000 which can be gifted to one person or split between several people. If you do not use your allowance in any given year, you can carry it forward to the next year only. This means you may gift an exempt amount of up to £6,000
  • a Small Gift Allowance of £250 per personwhich can be used for as many people in a year as you wish
  • a Wedding Allowance, allowing you to gift up to £5,000 to children, £2,500 to grandchildren and £1,000 to any other person getting married in a tax year
  • you can also make ‘gifts out of normal expenditure’ which can vary in size, as long as they are regular and funded by surplus income, not capital. You must also prove that the gift does not negatively impact your standard of living.

As well as Inheritance Tax, it is important to watch out for both Capital Gains Tax (CGT) and Income Tax, when gifting.

A cash gift does not necessarily attract a tax liability at the outset. However if you are selling existing assets in order to raise the required cash, or indeed gifting an asset, you may incur a CGT liability. Your CGT allowance, the amount of gains exempt from tax within any year, has recently been halved to £6,000 (2023/24) and is due to half again to £3,000 (2024/25), making a tax liability more likely than was previously the case.

For those thinking about gifting money to their children to invest for the longer term, it is important to consider the tax efficiency of the product you choose. Whilst children have their own tax-free personal allowance, savings allowance and CGT allowance just like an adult, they are not necessarily liable for the tax that may become payable once assets have been gifted to them. 

If you are thinking of gifting to your family, here are some options along with their tax implications for consideration.

Savings Accounts

A child’s savings account allows you to educate your children about the basics of saving for the future. With interest rates rising, savings accounts are looking more attractive. But remember, inflation is also running at an all-time high, which will erode the purchasing power of savings over time.  This could potentially lead to a negative return in real terms. If you are attracted to the simplicity of a cash savings account, ensure you shop around for the best rates possible.

It is important to note that if a parent invests money into a savings account for their child and that savings account generates interest in excess of £100 per annum, this will be taxed on the parent, not the child. This does not apply to gifts from grandparents.

Junior ISA (JISA)

If you are looking for tax free growth over the medium or longer term, a Stocks & Shares JISA may be an attractive option. Anyone can invest into a JISA on behalf of a child, and each child has a JISA allowance of £9,000 per annum. The monies are managed by the parent/guardian and cannot be accessed by the child, until they turn 18.

Lifetime ISA (LISA)

A LISA can be an attractive solution for adult children between the age of 18 and 39. You can contribute up to £4,000 per annum until the child is 50 years old, and the government will add a bonus of 25% to each contribution. For example a parental contribution of £4,000 will receive a government bonus of £1,000, making a total contribution of £5,000.

It is important to remember that a LISA can only be withdrawn tax free, if used to purchase a first home or accessed after the age of 60. If monies are withdrawn for any other reason, a 25% withdrawal charge will be deducted. Both Cash LISAs and Stocks & Shares LISAs are available.

Junior SIPP

Anyone can contribute to a Junior SIPP for a child, investing up to £3,600 per annum. This may be an attractive method of kick starting your child’s retirement pot. As these funds will not be accessible until your child is 55 (a figure soon to increase to 57) it is an option for the very long term. Any contributions receive tax relief at 20%, so a contribution of £2,880 would receive tax relief of £720, meeting the maximum yearly contribution £3,600.

Bare Trust

Those who wish to invest larger sums of money or retain more control of an investment and when it is accessed, may wish to consider an investment account written in ‘trust’. The simplest form of trust is a ‘Bare Trust’. Trustees (parents or grandparents) manage an investment for the beneficiary (their child). However, this option provides no immediate tax reliefs, and on encashment, the child would be liable to any potential tax payable.

As always, we recommend sitting down with a financial adviser who can help determine the most suitable and tax efficient solution for your individual circumstances. If you would like to discuss gifting to children in more detail please do get in touch.

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