Planning Financially for your family
As the cost of living crisis intensifies, shoring up the financial future of your children and other young family members has never felt more important but beware the tax traps.
Financial gifts can be an attractive option for parents and grandparents that want family members to have the same opportunities they did, particularly when you consider the mountain of money challenges facing young people right now. From the high costs of a university education to the huge deposits first-time buyers require to secure a home and rapidly rising living costs, young people increasingly need a helping hand to start their life.
While giving a financial gift might seem relatively straightforward, particularly if it is cash, choosing an option that is also tax efficient needs careful consideration. At a time when everyone is contending with high inflation, rising interest rates, diminishing tax allowances and a recession, passing money onto the next generation should never be done at the expense of your own financial security.
The last thing parents or grandparents should do is leave themselves short or trigger an unnecessary and unexpected tax bill that will potentially fall on the beneficiary, so if you are unsure about the tax implications of your gift or whether you can afford it, here is a guide to the tax-friendly financial gifting options this Christmas:
Cash is the simplest gift but don’t give too much
While giving and receiving cash does not incur a tax bill, if you die within seven years of making the transfer then inheritance tax (IHT) rules will come into play. This applies if the value of your estate exceeds £325,000 at death, with amounts over this limit potentially attracting a tax-charge payable by your beneficiaries.
The good news is that several exemptions apply outside the seven-year rule that allow people to make financial gifts without worrying about a hefty IHT bill. These include:
up to £3,000 can be given away every year tax-free. This allowance can be carried forward for one taxy ear which means up to £6,000 can potentially be gifted in a lump sum free from future IHT liabilities; and
the small gift allowance means multiple cash sums of up to £250 per recipient can be given without affecting an IHT liability.
In addition, people can also give money away that comes out of their regular income – a regular payment that does not affect the giver’s standard of living.
Rather than coins and cash, pre-paid cards can be an effective way for parents to give cash to young children as it helps their offspring get to grips with paying by card in this digital era. These cards are often paired with an app so that both the parent and child can track the spending – a useful tool for saving and budgeting – with parents able to set spending limits and monthly allowances. However, no interest is applied – demotivating for a child that wants to save – and most pre-paid cards come with a monthly or annual fee.
Cash gifts can be limiting if parents or grandparents have a vision of how they want the money to be spent, as younger children are likely to focus on short-term wants such as toys and games while young adults might blow the money on a holiday or a night out.
If the giver and beneficiary have agreed on a cash gift so that the money can go towards a big-ticket item such as a new computer, that’s one thing, but if the parent or grandparents want the money to be saved or invested for longer-term needs such as education or a house deposit, then a different strategy needs to be applied.