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Family matters: Generous ways to support younger generations
Turning to older generations for financial support is not a new phenomenon. However, there is evidence that the current cost-of-living crisis has increased the likelihood that family and friends are receiving financial assistance from their nearest and dearest.
We explored this trend in a previous article, looking at how an estimated 4.3 million retired people – known as the Bank of Gran and Grandad – are providing help by passing on the wealth within their savings and investments. Specifically, we focused on the issue of gifting and some of the tax considerations that arise in relation to this method of wealth transfer.
While gifting can offer many benefits, particularly where there is an immediate need, it is not the only route open to grandparents who are keen to give financial help to their children and grandchildren. In this article we look at some of the alternative options for investing in the futures of younger generations.
Individual Savings Accounts (ISAs) provide a robust vehicle for tax-efficient saving, with investment returns or dividends earned benefiting from the fact they are tax free. A Junior ISA performs the same function, but the money is held on behalf of a child, who cannot take control of the account until they turn 16 and cannot access the funds until they turn 18. The current allowance for a Junior ISA is £9,000, and it is not possible to transfer money between a Junior ISA and an adult ISA.
It might feel jarring to speak about children and pensions in the same breath, but saving for later life can arguably never start too soon. Family members can contribute up to £2,880 every financial year into a self-invested personal pension (SIPP) that has been set up for a child, which falls just inside the annual £3,000 individual gifting limit. Contributions also benefit from 20 per cent in relief from the government.
Such a long-term savings plan not only has direct benefits in terms of the money accrued and the effect of compounding interest over time, it can also help instil awareness of the value of saving from a young age and provide a sound platform upon which future investments can be made.
Putting money into a trust can be a way of retaining greater control over money intended for children or grandchildren, and there are a variety of options available. An example is a bare trust, where investments are not tax-free, but the beneficiary is the child in question, and so any tax liability will be evaluated in light of their personal income tax and capital gains tax allowances.
Notably, this situation does not apply when the investment is made by a parent and the income from the trust exceeds £100 – circumstances which mean the tax liability would pass to the parent. This can make bare trusts an attractive option for grandparents if they are happy to accept that the beneficiary has full access at the age of 18.
Another option is a discretionary trust, where a child or multiple children are beneficiaries, and the trust fund is not included within any beneficiary’s estate. In this type of trust, responsibility for decisions about how and when funds are distributed ultimately resides with trustees. This can provide a high degree of flexibility, however the tax implications can also be complicated, with certain special rates applicable.
Perhaps a more straightforward way of passing wealth to members of your family is to gift them money when they tie the knot, enabling you to give them something more than your best wishes on the big day. There are tax-free allowances for money given in the context of a marriage or civil partnership, amounting to £5,000 for each parent and £2,500 for each grandparent, and these allowances are not linked to any other giving limits.
Whether through gifting mechanisms such as this or through savings and investments, the path – or combination of paths – you consider taking in order to pass down wealth to younger generations should fit with your own situation.
After all, just as there is a rise in the number of grandparents providing financial help and the amount of money they are giving to appreciative family members, there is also a large proportion of people in their late fifties and early sixties delaying their retirement in order to manage the impact of rising costs on their own household budget.
Getting a clear handle on all of your finances and knowing which tax-efficient options are available to you means you can make an informed decisions about how best you can help others.
The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.
You should be aware that the value of an investment can fall as well as rise and that investors may not get back the amount they invested.
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