If you’re looking to make sure your children or grandchildren benefit from your generosity rather than the taxman, here are the things to be aware when it comes to tax efficient gifts for Christmas.

Exempted Gifts

There’s no Inheritance Tax to pay on small gifts (up to a total of £3,000 per annum) as long as you can maintain your standard of living afterwards.

Your annual exemption can be carried forward for one year if you do not use it. If you make no gifts this year, you can give away a total of £6,000 next year.

Other ‘exempted gifts’ include:

  • Unlimited gifts to a spouse/civil partner during your lifetime (in the UK)

  • Wedding/civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)

  • Payments (sometimes) from your income (not savings) for a person’s living costs, such as an elderly relative or child under 18/in full-time education

  • Gifts to charities and political parties

You can use more than one exemption on the same person – you could give your grandchild gifts for Christmas and wedding in the same tax year.

People you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in total in the 7 years before your death.

You can also give unlimited gifts of up to £250 per person per tax year as long as you have not used another exemption on the same person.

Estate and tax planning is a complex area so take professional financial advice to avoid significant pitfalls when making a gift. For example:

  • Gifts to an unmarried partner might incur Inheritance Tax
  • Income made from gifts could have tax implications for the beneficiary, for example, Capital Gains Tax
  • You must keep records to prove compliance
  • Gifts must be regular, such as every Christmas
  • You must retain no benefit from a gift to avoid IHT. If you give away your home but continue to live in it rent-free, you are still deemed the owner, and the property will be taxed as part of your estate.

Savings Accounts

Children are taxed the same as adults so can earn up to £18,500 a year from savings without paying tax on it (£12,500 personal allowance + £5,000 starting savings allowance + £1,000 personal savings allowance (PSA)).

Advantages

Savings stay under your control, so you can access cash at will (until control passes to the child, at around age 16).

Disadvantages

If money is given by parents (not other relatives) the child can only earn £100 per year in interest, after which tax is paid on all savings at the parent’s tax rate, unless parent is within their annual PSA.

Junior ISA

A Junior Individual Savings Account (ISA) is a long-term, tax-free savings account designed for children. Only those with parental responsibility for a child can set these up, but anyone can contribute to them, up to the annual limit of £4,368 in 2019/20.

There are 2 types – a cash Junior ISA, and a stocks & shares Junior ISA.

Those aged 16 or 17 can have a junior ISA AND an adult cash ISA or Help to Buy ISA. At 18, cash ISAs can be merged with ex-junior ISAs, if transfers in are accepted.

Anyone born between 1 September 2002 and 2 January 2011 had a Child Trust Fund automatically opened for them by the Government. Since April 2015, these can be converted into most junior ISAs, which offer better rates.

Advantages

If tax allowances are not used, they are lost for good. However, once in the children’s ISA wrapper, they remain tax-free year after year.

They may pay a better rate of interest.

Disadvantages

Cash is locked away until the age of 18, so cannot be accessed.

Junior ISAs belong to the child and on their 18th birthday the money is theirs to do with as they please, even if this is not what the savers had in mind.

Child’s Pension

Parents/legal guardians can set up a pension for a child which will pass to them at age 18. Anyone can contribute to a child’s pension to a maximum of £2,880 a year, which the government tops up to £3,600 due to tax relief (2018/19).

This is a great way to ensure the beneficiary has financial security for their entire life, and encourage children to prioritise pensions from an early age.

A pension remains one of the most tax-efficient vehicles available. It could be a way of using your exempted gift annual allowance to reduce eventual IHT.

Options include a Junior Sipp or a Stakeholder pension.

Anyone born between 1 September 2002 and 2 January 2011 had a Child Trust Fund automatically opened for them by the Government. Since April 2015, these can be converted into most junior ISAs, which offer better rates.

Advantages

An extra 18 years of compound interest and tax relief can have a spectacular effect on a pension pot, and set up a wealthier retirement.

Very tax efficient.

Disadvantages

Money cannot be accessed until beneficiary approaches retirement, currently age 55, but will rise as state pension age changes. They are likely to have greater need for capital beforehand, such as a house deposit.

Premium Bonds

Grandparents and parents can already buy Premium Bonds for children. From March 2020 relatives and family friends will also be able to gift Premium Bonds, and the minimum investment is dropping from £100 of bonds to £25.

Premium Bonds give savers the chance to win tax-free prizes every month, ranging from £25 to £1 million, and the money is backed by the Government.

Advantages

Well-established no-risk savings with easy access.

Disadvantages

No interest paid so lack of return unless your numbers come up.

Trust Funds

Whilst trusts can offer tax advantages, the key use is to control how wealth is distributed and to protect assets.

Gifts into trusts will fall outside your estate for IHT purposes after 7 years. There might also be income and capital gains tax (CGT) advantages.

There are two main Trust types – bare and discretionary trusts. Bare trusts are less flexible, and are usually set up for a child with money taxed as if it belonged to them. At age 18 they have a right to the money.

Discretionary trusts are more versatile, allowing greater control and flexibility but have complex inheritance tax, income tax and capital gains tax rules.

Advantages

Protect family assets, possible tax advantages.

Disadvantages

Costs and complex rules, so seek professional advice.

Parents can get caught out by the £100 rule (see above).

Summary

There are lots of ways to give tax efficient gifts this Christmas and beyond. The best options for you and your family depend on your attitude to risk, ages of the beneficiaries, and your long-term goals. Take advice from a qualified financial adviser who will match these factors to the most suitable investments for you.

To speak to a Cardiff Financial Adviser contact Tony Thomas on 07585 592494 or tony@wealthmasters.co.uk

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