For many of us, gifting money to our children and grandchildren and helping them on the path to financial security is an important part of our long-term financial plan. This can require some thought and planning, as there are a variety of options available.
A financial planner can help you work out the best option for your specific circumstances, but to help you get an idea of what is available we run through some of the options below.
Junior ISA (JISA)
Setting up a Junior Individual Savings Account (JISA) is a popular option for parents looking to save for their children, and there are two types of JISAs available – cash, and stocks and shares. The main advantage of a JISA is that any growth is tax-free in a similar way to an adult ISA. This means that no tax will be due on capital growth or for receiving dividends or interest.
Only parents or a guardian can open a JISA for a child who is under 16. However, for children born before 2nd January 2011, the Government will have automatically opened a Child Trust Fund (CTF) in their name, which was the predecessor to the JISA. It is possible to convert a CTF into a JISA. Once opened, anyone can contribute into a JISA including parents, grandparents, friends and relatives and the JISA subscription limit is £9,000 each tax year.
Any contributions will be locked away until the child’s 18th birthday and the donor will have no right or access to any of the funds they contribute. Once the child turns 18, the JISA is converted into an adult ISA and at this point the child gains full control of the funds. Careful consideration should be given as to whether you would feel comfortable with your child or grandchild having access to a potential large sum of money at this point.
A rule that many people are unaware of is that a child of 16 or 17 years old can benefit from both the JISA subscription limit of £9,000 and contribute £20,000 each tax year into an adult cash ISA meaning they can make use of £29,000 of ISA allowance each tax year.
If you’re looking for a more long-term way to save money for your children or grandchildren, setting up a pension for them may be a good choice. There is no minimum age for setting up a pension for a child, and for children with no earnings it’s possible to contribute up to £2,880 net per annum on their behalf. With this, you’ll receive 20% tax relief of £720 from the government which will be added to the pension resulting in a gross contribution of £3,600.
As with a JISA, any growth within a pension is tax-free and the donor will have no right or access to any of the funds they contribute. Under current legislation, it is not possible to access a pension until age 55 and this is due to increase to age 57 by 2028.
This means it will not be possible for the child to benefit from these funds for decades, so a pension isn’t going to help pay for early life events such as higher education or a deposit towards a first home. The flip side of this is that there is no worry about funds being accessed potentially before the child is mature enough to manage them, and that any contributions will be allowed to grow over a very long-time horizon.
Designated General Investment Account (GIA)
If you’re looking for a simple way to earmark funds for your child or grandchild, setting up a General Investment Account (GIA) and designating the account for a child may be a good choice.
The GIA is set up in your own name and you retain full control over and access to any funds. The advantage of this is that you can decide how and when the child receives any money. If you change your mind or need access yourself then you are able to withdraw from the account as you wish.
The disadvantage is that GIAs are less tax efficient than JISAs or pensions. Capital gains, dividends and interest are all potentially subject to tax. As the account is held in your own name, any tax liability would fall on you.
A discretionary trust allows for assets to be gifted into trust for the benefit of the child. The trustees use their discretion to distribute the trust’s assets to the beneficiaries, and a parent or grandparent can be both a settlor (the entity that establishes a trust) and trustee.
An advantage of using a discretionary trust is that the trustees have control over how and when the beneficiary receives funds.
However, trusts can be more complex and involve more administration than some of the other options listed. It is important to note that gifts into a discretionary trust are classed as chargeable lifetime transfers for Inheritance Tax purposes. Where the value of the chargeable lifetime transfer, in addition to any other chargeable lifetime transfers made within the previous seven years, exceeds the Inheritance Tax threshold (currently £325,000), there is an immediate tax charge on the excess. If paid by the trustees the tax is 20% and if paid by the settlor the tax is 25%.
Additionally, where gifts are made by a parent then parental settlement rules will apply. This means that if the income within the trust is above £100 a year, it would be treated as income of the parent and potentially liable to tax.
What is best for you?
With an overview of the different options available for saving money for your children or grandchildren, you may have a clearer idea of how you would like to invest in their future. Speaking to a financial planner will help you to make a clear decision appropriate to your family’s needs and situation, so please do reach out to us today to see how we can best advise you.