Gifting Money to Kids? Here’s the Tax-Smart Way to Do It

Junior ISAs can take some of the complexities out of gifting your money to your children or grandchildren in a tax-efficient way, helping to build a sizeable nest egg for the future. The laws surrounding the taxation of gifts to kids can be complicated.

For instance, the UK has a seven-year rule when it comes to inheritance tax (IHT) liabilities, where if you die within seven years of gifting money, you may find that the money becomes part of your estate and taxed accordingly.

As part of the seven-year rule, non-exempt gifts are included in your IHT liabilities on a tapered scale, provided that your estate is larger than £325,000 in total.

This means that if you survive for less than three years after gifting the money, you’ll be taxed at 40%, between four and five years at 32%, five to six years at 16%, and six to seven years at 8%.

As long as you live for more than seven years after gifting money, you won’t be taxed for your contributions. Particularly for grandparents, this can make it more rewarding if you take a proactive approach to transferring wealth to your loved ones sooner rather than later.

Parents also have to jump through hoops when it comes to taxation, and if your child gets more than £100 in interest from money gifted to them, then you’ll be liable to pay tax on all the interest if it’s above your own personal savings allowance.

However, you’ll be exempt from paying tax if you gift the money into a tax-free Junior ISA.

The Advantages of JISAs

Junior ISAs, or JISAs for short, have become one of the most popular approaches when it comes to investing in your child’s future, and their tax-free benefits are already helping to generate significant amounts of wealth for children throughout the United Kingdom.

Data shows that the tax efficiency of JISAs has helped almost 2,000 children to build portfolios worth more than £100,000, while more than 370 kids have amassed a wealth of more than £200,000 before turning 18.

The great thing about Junior ISAs is that they are a tax-free wrapper, which means that no tax is paid on the interest your child earns or the profits made on their investments.

JISA contributions are capped at £9,000 per year, but thanks to the power of compounding (where returns are reinvested over time), your child’s pot can grow into a meaningful sum by the time they turn 18. Junior ISAs can’t be accessed until the child turns 18, which has helped to create an exceptionally large window for investments to grow without interruption.

Another key benefit of JISAs is that anyone can contribute to them, meaning that not only can parents gift money to their children, but grandparents or even family friends are able to add money to a JISA.

Gifting More Than £9,000?

The annual JISA allowance is capped at £9,000, so if you have more to set aside for your child, it’s worth thinking about how to make the rest work in the meantime.

Any surplus could be held within your own Cash ISA or Stocks and Shares ISA, or your spouse’s, where it continues to benefit from tax-efficient growth until the next tax year begins on 6th April and allowances reset.

If you do use a spouse’s or family member’s ISA, bear in mind that the money will legally belong to them, so it’s important to be clear about your intentions before doing so.

The Smarter Way to Gift Money

Junior ISAs are an excellent way to gift money to children because they’re tax-efficient and can help adults to avoid complicated inheritance tax rules and other taxation laws that can eat into the amount of money your loved ones receive over time.

Much like adult individual savings accounts, JISAs can be savings-focused with fixed-rate Junior Cash ISAs or investment-oriented with Junior Stocks and Shares ISAs. This allows for a more flexible approach to wealth management and helps you to save for your kids in a way that suits your risk tolerance.

It’s also possible to begin saving in a Junior ISA from the moment your child is born, so there’s really no time like the present to make the most of the benefits of compounding and build a substantial nest egg for the future.

Category:  Parenting