Setting the right tone

For parents, teaching financial literacy to your children at a young age creates opportunities for a better financial future through effective money management. Children as young as seven can learn basic money skills to help them navigate the complexities of finances later in life.

‎Many parents will have found themselves facing a dilemma at some point; how do we help our children find their way in the world financially and yet instil financial discipline in them, to make sure they can stand on their own two feet? To make sure they have the incentive to work hard and achieve their personal goals without relying on us?

‎If you like being able to say; “Yes, I’d love to help you with a deposit on your first property” but “No, do you really need a new sports car?” then you are already thinking of what is best for your children. A good way to start with your children is to encourage interest by giving them small amounts to invest and spending the time to help them understand the benefits.

‎Most parents struggle to fight the urge to spoil their children but being strict with any "handouts" and being able to say no (which every parent hates doing!) is helping to make them responsible for managing their own finances. So, they see that these decisions have consequences, and you can’t have everything just given to you on a plate i.e. a decision to buy x means I can’t buy y…not, I’ll buy x and then Mum and Dad will give me the money to buy y.

‎Thankfully the world of financial planning provides considerable help when it comes to setting the right tone by way of both government sponsored tax breaks and others which allow parents to create a “nest egg.” I wrote previously about different ways in which you can build a nest egg for your children.

‎Parents can actually pay up to £3,600 p/a into a Pension for each child and receive tax relief at 20%; in effect they pay £2,880 p/a and the pension administrator claims the balance back from Her Majesty’s Revenue and Customs (“HMRC”). This is very long-term planning as the child will not be able to access the pension until they are well into middle age (age 55) but hopefully by then it will have accumulated into a sizeable pot. At that stage (under current rules which of course may change), up to 25% of the pension value can be taken as a tax-free pension commencement lump sum. Grandparents can take advantage of the same opportunity to save for their grandchildren.

‎The Junior ISA (or "JISA") allows parents or grandparents to invest up to £9,000 p/a into securities or cash, on behalf of their child / grandchild. All income and capital growth is free of tax. The invested amount becomes the child’s absolutely at age 18 and so can be used to help with university fees or later on with the purchase of their first home. However, there is no compulsion for the child to use the money in this way as they could potentially blow it all…which is where financial discipline comes in.

‎For parents or grandparents looking to provide more significant amounts for their children or grandchildren a Discretionary Trust may be the answer. It is possible to place up to £325,000 per parent onto a trust — so £650,000 in the case of a couple. For anything above £325,000 then an immediate charge to inheritance tax (IHT) may arise at 20%. For this very reason, this type of trust is often known as a ‘nil rate band trust’ as it is equal in amount to the IHT nil rate band. Specialist tax advice should be taken before proceeding with this type of planning.

There are few restrictions on how the money can be invested in such a trust except that the trustees who oversee the trust (who are often the parents themselves) have a duty to keep a close eye on things and to act responsibly. It is possible for the trust to lend money to beneficiaries to help with a deposit on a property purchase. All income and gains are taxed a trust level but if income is distributed to the beneficiaries, then it becomes their income for tax purposes and so tax may then be reclaimable.

‎One of the important advantages is that the trust is discretionary. This means that distributions of income and capital are made at the discretion of the trustees and therefore if one of the beneficiary children is “going off the rails” distributions to them are simply stopped temporarily.

‎For parents who are resident outside the UK, but who have children living or studying in the UK, it may be possible to place far more significant amounts onto a non-UK Trust (e.g. Jersey) and for the non UK trustees to make tax efficient distributions into the UK.

‎Next time we will look at how parents can free up equity from their own home to help with their children’s property purchases and we will have a deeper dive into IHT and how this impacts such inter-generational planning.

‎Rosecut can help you with any of the above, either directly or through our comprehensive professional network so please drop us an email us at contact@rosecut.com for more information and support.

‎Tax benefits may vary as a result of statutory charges and their value will depend on individual circumstances. Specific risks associated with particular investments are detailed on this website and in our printed literature. You should consult with a professional tax advisor for any tax advice and support.

‎The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. You should be aware that past performance is no guarantee of future performance.