Helping children and young people financially. What are the choices?

Whereas once the onus was on young people ‘standing on their own two feet’, against this backdrop most of us now agree that – financially – we had it easier. Because of this, giving children and young people a financial helping hand is becoming increasingly common. Here, we look at what you need to consider when making financial gifts and the options available.

Have you got enough money for yourself?

People are often reluctant to give money away because of the very real concern that they may run short themselves. None of us know how long we’ll live or what the future holds so this is understandable but what may surprise you is that a good financial planner can show you, with a high degree of accuracy, what your future finances will look like. They do this using cashflow modelling and if you’d like to make financial gifts, it can be invaluable in giving you confidence.

Is there tax on gifted money?

In the UK there is no tax to pay – by either you or the recipient – if you live for seven years after making a financial gift. If you don’t, there may be inheritance tax to pay. But, there are also certain gifts you can make that are exempt from inheritance tax immediately:

• We all have a £3,000 annual gift allowance known as the ‘annual exemption’. You can divide this among multiple people and the allowance can be carried over for one year so if you haven’t used it previously, you’ll have £6,000.
• You can give as many small gifts of £250 per person as you like, regular gifts out of your excess income, wedding gifts up to a certain amount and some others.

What are the choices when saving for children?

If you want to save or invest for a child rather than gift money now, there are a number of options to suit different circumstances.

Junior ISAs

These are tax-free accounts that let you save or invest up to £9,000 each tax year. The funds belong to the child and are locked away until they are 18. A parent or guardian needs to open the account but anyone can contribute.

Designated accounts

These don’t come with tax-free benefits but there are no restrictions on how much can be held in them, when the funds can be accessed or who can open an account. If anyone other than a parent sets up a designated account, it may be possible for the child’s income tax allowances to mitigate tax liabilities. In all cases the child’s capital gains tax annual exemption can be used.

Trusts

Those wanting to save bigger sums, or hold money beyond the child’s 18th birthday, can choose to set up a trust. These can also give more control over the funds than other accounts. There are many types of trusts designed for different purposes and with different tax rules. A financial planner can help you.

Pensions

You can pay £2,880 into a pension every tax year on a behalf of a child. They won’t get the money until they’re at least 57 but because it will be left invested for so long, it will benefit from compounding, so the sums you invest could grow substantially.