The end of the tax year presents a final chance to make use of tax allowances and exemptions that can give children a big step up the financial ladder.
“Saving is a very fine thing. Especially when your parents have done it for you.” As the intergenerational wealth divide widens, Winston Churchill’s often-quoted words now resonate increasingly with grandparents and other family members as well.
We all want the best for the children in our lives. We don’t know what their future will hold, but want to make sure they have every opportunity to do well and be happy, whatever they eventually decide to do.
Of course, money isn’t everything, but starting to save early on their behalf might make the difference between whether or not they can afford to do what they would like when the time comes.
The pleasure to be had from being able to see younger generations benefit from lifetime gifts also needs to be measured against the very real need to help them deal with today’s financial challenges.
The figures are all too depressingly familiar to younger generations. Research by The Sutton Trust revealed that English university students will graduate with an average debt of £44,000; by far the highest level in the English-speaking world and more than double the average debt levels at universities in the United States.¹
First-time buyers now need to put down an average £33,000 deposit to get onto the property ladder. Unsurprisingly, that means the typical first-time buyer is now aged 32.²
It means that what was once a ‘nice to do’ savings idea is increasingly becoming a necessity. But putting away funds for the benefit of children or grandchildren can also play an important role in helping families come together to bridge the intergenerational divide. In doing so, they can reduce the burden of Inheritance Tax (IHT) to ensure more wealth remains in the hands of the family and not the taxman.
Perhaps the most important opportunity to combine lifetime estate planning with saving for children is the annual gifting exemption. You can make gifts worth up to £3,000 in each tax year, and carry forward last year’s, if you haven’t used it already. That means a couple could potentially remove £12,000 from their joint estate immediately, as long as they use both years’ allowances by 5 April.
You can pass on larger amounts of money free of IHT, so long as you live for seven years after making the gift. It’s also worth considering the ‘normal expenditure out of income’ rule. This allows you to make regular gifts out of income which are exempt from IHT as long as they don’t affect your standard of living.
A tax-efficient Junior ISA is justifiably the first option for most savers to consider. A maximum of £4,128 can be invested for each child in a Junior ISA in this tax year, rising to £4,260 from 6 April. Savers can typically invest a lump sum or make regular contributions, providing the flexibility to fit in with gifting plans.
Launched in November 2011, the scheme was initially slow to catch on, although 794,000 accounts were subscribed to in the last tax year. A total of over £3.3 billion is now held in Junior ISAs – a testament to the scheme’s growing popularity.³ And yet many of those generously making Junior ISA contributions risk failing to make the most of the opportunity. Nearly 60% of Junior ISA funds are deposited in low-paying savings accounts.
“Junior ISAs are designed to be long-term savings vehicles, and those who save for their offspring or grandchildren at the earliest opportunity have got 18 years for the money to grow before the funds are transferred into a standard ISA,” says Phil Woodcock, Head of Investment Communications at St. James’s Place. “For those who choose to invest in a Stocks & Shares Junior ISA, that should be plenty of time to ride out market fluctuations and benefit from the compounding effect of tax-efficient income and growth.”
It might be considered a disadvantage that a child can access Junior ISA funds when they reach the age of 18, as there is a possibility that shorter-term financial priorities take precedence. At the other end of the age scale, it’s worth remembering that anyone can contribute to a pension plan for a child; but of course, that means the funds will generally be unavailable until the beneficiary is aged 55. That said, this could also be an advantage because it enforces a long-term view of saving.
A net annual contribution of £2,880 would attract tax relief of £720, making a total investment of £3,600.
As the end of the tax year approaches, there is limited time left to explore and make use of the allowances and exemptions available to help shape the future of the children in your life.
¹ The Sutton Trust, Degrees of debt, April 2016
² Halifax First-Time Buyer Review, July 2017
³ HMRC, Individual Savings Account (ISA) Statistics, September 2017
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.