No stocking thriller but bank on this gift
INSTEAD of filling the family’s Christmas stockings with more gadgets and gizmos, experts suggest giving them something with real staying power.
Money may not be the most exciting gift, but unlike most toys it will not break or end up in the bin, and often has plenty of tax benefits as well.
Granting your family a “living legacy” could cut inheritance tax bills in the future while an investment plan could give children or grandchildren a brighter tomorrow.
The perfect gift is not just for Christmas, it could well last your loved ones a lifetime. You can make gifts of up to £3,000 each year with money instantly falling out of your estate for inheritance tax (IHT) purposes and couples can give away £6,000.
If you’ve not used last year’s £3,000 allowance you can mop that up, too, taking the total to £6,000, or £12,000 for couples.
You can also make small IHT-free gifts of up to £250 to as many people as you like, provided they have not benefited from the £3,000 exemption. Liz Alley, head of financial planning operations at Brewin Dolphin, said cash could be the ideal last-minute gift and also saves you from rushing around the shops: “While you may worry it is impersonal, your children or grandchildren can put it to good use for their future.”
Parents and grandparents can also make regular gifts out of spare income throughout the year, which are also IHTfree provided that it does not affect their standard of living.
Larger one-off gifts are known as “potentially exempt transfers” and will be totally free of IHT only if you live another seven years.
Alley explained that more people are passing on a living legacy and Brewin Dolphin’s research shows recipients are using the money wisely.
“The most common uses are investing the money, paying down the mortgage, or even covering everyday living costs,” Alley said.
Do not get too carried away playing Santa Claus, though, and make sure you have enough money left for your own needs. Christopher Pyrkosz, head of investment trusts at Martin Currie, said investing a regular monthly sum on behalf of your children or grandchildren really adds up: “If you had invested £20 a month in global stocks and shares 18 years ago it would now be worth around £10,000. If you had put the money in cash you would have just £4,300.”
You can invest tax efficiently for children through a Junior Isa, with friends and families able to contribute a maximum £4,128 this tax year. Investment firms Aberdeen Asset Management, Alliance Trust, Baillie Gifford, JP Morgan, F&C Management, Martin Currie and Witan run popular children’s investment plans.
Annabel Brodie-Smith, communications director of the Association of Investment Companies, said you can invest from £25 a month, with lump sums from £50: “Even relatively modest amounts can give your children a head start.”
A savings account is safer, but is likely to grow at a slower pace, although Anna Bowes, director of independent savings advice site Savings Champion, said: “A number of children’s savings accounts pay more than adult accounts and rates tend to be more stable.”
Coventry Building society pays a variable 3.50 per cent on £1 in its Junior cash Isa, which is available via branches or by post. Nationwide pays 3.25 per cent, Tesco Bank pays 3.15 per cent and Halifax 3 per cent. Bowes added: “If you gifted just £100 a year in an account paying 3.50 per cent your child could have around £1,200 after 10 years, or £2,500 after 18 years.”
If family and friends gifted the Junior Isa maximum of £4,128 a year from birth at 3.50 per cent the child could have almost £105,000 by 18. This can help demonstrate to children the main benefit of long-term savings and install a valuable skill for life, Bowes added.
You can, of course, save into a standard children’s savings account, with Halifax paying out 4.5 per cent, which is fixed for 12 months, HSBC paying a variable 2.75 per cent and Nationwide 2.50 per cent.