Saving money to create a lasting legacy can be one of the most fulfilling financial goals in midlife. And leaving a legacy isn’t just for Succession-style tycoons. Whether you’re a parent, grandparent, aunt, godparent, or simply a groovy forward-thinking adult in a young person’s life, there are many ways to pass on financial gifts to children. These can include savings, investments, and even government-backed schemes that offer top-ups and tax benefits. In this guide, we explore the different options available for gifting money to children, helping you make the most of your contributions and ensure your legacy lasts. This piece is sponsored by AJ Bell Money Matters.
Before we get into the why’s and how’s of this type of investing, it’s important to say that you need to make sure you have sufficient funds to meet your own future needs first. Whether that’s to cover travel plans, living costs, rent, mortgage payments or repayment, medical costs or the outlays associated with later life care.
- What you should know about ethical investing
- Video: How to understand investment risk
- How to consolidate your pensions
- Financial planning for childfree women
If you have a healthy pension fund and savings to cover your future outgoings, there are numerous ways to save money for your legacy. Your starting point needs to be to think not only about what you want to do with the money allocated to your legacy beneficiary but also why you want to do it.
Investing for children and grandchildren
When investing for the children in your family, think about how you’d like the money to make a difference in their lives.
- Decide how you’d like the money to help them – “Do I want to give my children or grandkids a secure financial future? Do I want to help them to buy a car or their first home? Or help with university costs?”, asks Petronella West, chief executive of financial advice business Investment Quorum. These are the sort of considerations you need to take into account, she says.
- Think about your investment timeframe – This is a standard factor when investing: When do you want the money to be available and how long will you be investing it?
- Decide the savings and investing route that is most appropriate – How much you’re putting aside and the type of accounts it will be in will determine the best choice so your young person can benefit
Important rules about gifting money to children
The rules for gifting money to children above all mean thinking about inheritance taxes. Any money you plan to give away to your kids or grandkids will be viewed as a gift by HMRC. This will have implications for your estate, which could be subject to inheritance tax (IHT) at a rate of up to 40% at death. Whoa! Here’s how to avoid it:
- Each year, you can give £3,000 worth of gifts which are exempt from IHT, so keep track when it goes over that amount
- If you gift more than that, you can avoid IHT by giving it 7 years before your death. Obviously that’s hard to predict but it’s a good reason to plan your gifting
- The good news for those who want to leave money or property to a cause: Any gifts made to UK registered charities are exempt from IHT
Cash or shares?
If you would like children or grandchildren to have access to the money within the next 5 years, cash will be the safest route. Shares typically deliver higher gains over longer periods, but you have to be prepared for ups and downs, so it is not worth taking on the risk if they need the money relatively soon.
If your timeframe is more than 5 years, then you should consider investing in the stock market to maximise potential gains, either through direct shares, bonds or funds.
An ISA of your own
ISAs are an attractive way to save, whether it’s for kids, grandchildren or causes you care about. You can invest up to £20,000 tax-free each year across three different types of ISA: cash, stocks and shares, and the Innovative Finance ISA, which invests in riskier “peer to peer” loans to individuals and businesses.
You could, for example, invest in a stocks and shares ISA via an investment platform like AJ Bell and gift the proceeds to your children, grandkids or a charity.
- This route provides you with full control over how the money is invested
- You must feel comfortable giving up your own tax-free allowance
The Junior ISA
Another option is to save money into a Junior ISA for a child or grandchild who is under the age of 18. Up to £9,000 can be invested each tax year, in addition to your personal £20,000 allowance. The money can’t be accessed until the child is 18 and, like with an adult ISA, any interest or gains made within the account are tax-free.
Saving regularly into a Junior ISA can build a nest egg to help your child or grandchild to pay for a first car, university fees and living costs, or a deposit for their first home.
There are two types of account available: cash or stocks and shares. The latter is available at AJ Bell.
- Junior ISAs can only be set up by a parent or guardian
- Once set up, any family member can make gifts into the account each year
- If you’re an auntie, grandparent or other relation, you are unlikely to have control over how the money is invested
Another concern is the worry that the money might be squandered once the child gains access at 18. Petronella advises talking to the young person from the age of 11 to help them understand what the savings are intended for. Something that also helps them to develop a savings mentality, rather than a spending one.
The Lifetime ISA
The Lifetime ISA (LISA) is another option if the young person is between 18 and 40 and it has a big benefit. This method of gifting money to children features top-ups from the government!
Designed to help individuals to save for their first home or later life, up to £4,000 of a person’s £20,000 annual allowance can be saved into a LISA up to the age of 50.
- The young person is responsible for opening and managing the LISA
- The government tops up the savings by 25%, up to a maximum of £1,000 each year, which is a big attraction
- Stocks and shares or cash accounts are available – AJ Bell offers a stocks and shares LISA
An important thing to note about the government top-up: “These generous bonuses come with strings attached,” says AJ Bell’s Charlene Young. “The money will be tied up until they buy a home up to the value of £450,000 or reach the age of 60. And most significantly, if money is withdrawn outside of these circumstances, a 25% penalty is applied to the amount taken out.”
It’s also important to take into account that the current property value limit of £450,000. People will find it tricky if they’re looking to buy in more expensive areas like London, where the average first-time buyer house price is £492,000.
An investment account held in trust
When gifting money to children, if you prefer to have more control over how the money is saved for a child under the age of 18, you could consider setting up an investment account held in a simple “bare” trust.
There is no limit to the amount that can be invested, so this is popular with people who are looking to gift larger sums.
- Anyone can set up a bare trust to benefit a child
- Unlike a Junior ISA, you can pick the investments (under the supervision of other trustees that you appoint)
- The child can gain access to the savings when they turn 18, but if they are happy with the arrangement you could continue to manage it for them.
- Money can be withdrawn before the age of 18 as long as it’s used for the benefit of the child, which makes this a good option if you’re looking to contribute towards school fees, for example. Alternatively, the money could be used for university fees or a house deposit.
Important tax information about bare trusts
A note about the tax on a bare trust: If a parent sets up the trust, and income or dividends of more than £100 are generated, the income will be taxed as if it belongs to the parent. If the trust is set up by another adult, responsibility for paying tax on any gains or income from the account will fall on the child, who can use their annual tax allowances for income, dividends and capital gains (which collectively total £16,570).
“Unless huge sums of money have been invested, for the most part investing via a trust can be relatively tax-efficient,” says Charlene Young. Although certainly there’s more administration involved compared to a Junior ISA or pension, as the trust has to be registered with HMRC. Investment providers, like AJ Bell, can provide you with a form to help set things up and guide you through the process.
A Junior SIPP
If you have utilised the annual Junior ISA allowance and want to put more money aside to support your child or grandchild’s future, you could save via a Junior self-invested personal pension (SIPP). (You can easily set one up via AJ Bell.)
Young describes this as the “ultra long-term option”, as the child won’t get access to the money until they are 57 (this could well increase in the future). Where a Junior ISA or an investment account in trust will help your children and grandchildren during the first 40 years of their life, the SIPP can support them in their late 50s and beyond.
- Each year, you can invest up to £2,880 in a Junior SIPP which the government then tops up with tax relief to £3,600.
- Like with the Junior ISA, only a parent or guardian can set it up, but family members can gift into the account.
“Once the money is in the account, the investments are sheltered from tax,” Charlene explains.
Given the super long investment time horizon, it will make sense to have all of the portfolio in shares to maximise the potential for gains. However, you must be prepared for bumps along the way.
Next steps for gifting money to children
Whatever the reasons and principles for your investments and the outcomes you want, there are options to suit you. It pays to take the time to research and consider which one, or ones, are best for you. Visit AJ Bell Money Matters to find out specifics about your options and set up the right financial instrument to gift money to your young person.
This piece is sponsored by AJ Bell Money Matters and part of our Shape Up Our Finances, which focusses on financial provision for women in midlife
To stay on top of and in control of your finances, sign up here for the AJ Bell Money Matters newsletter.
