There are many ways and you should take advice to see what suits you best, but one way is to use a Junior ISA. A sum of £3,840 (current tax year) can be paid into a Junior ISA and there are neither capital gains tax nor further tax on any income. Interest on cash held in a Junior ISA is paid gross and no withdrawals are permitted until the child reaches 18, when their Junior ISA is automatically converted into an adult ISA. It is then they are entitled to have full access to their investments and savings, which can help with the cost of university or perhaps provide a deposit for a house.
Any payments to a Junior ISA will be a gift and will usually be counted as part of your estate, and therefore potentially subject to inheritance tax, should you die within seven years of giving the gift.
There are exceptions to this rule; the first exception is the annual exemption allowance, which allows a person to give away up to £3,000 in any one tax year and this amount will not be subject to inheritance tax. If you don’t use this allowance in a year, you can carry it forward for one tax year only.
If you have already made a gift of your annual exemption, then the second exception may
be of use: the small gift exemption allows you to make a gift of £250 without inheritance tax implications. However, it cannot be given to the same person that received the annual exemption.
Finally, if you have income which you do not spend on an annual basis you may be able to make gifts from this surplus income. This exemption is called ‘gifts from normal expenditure out of income’ (a bit of a mouthful!) and provided that the gift formed part of your normal expenditure, was made out of your income, and leaves you with enough income to maintain your normal standard of living, there will be no inheritance tax implications and the seven year survival rule does not apply. In addition, you can still make the annual exemption gift.
For example, if you have net income of £40,000 per year and your usual annual expenditure each year is £30,000, there is a surplus of £10,000 each year. You can give some or all of this entire surplus away on an annual basis to your children or grandchildren without inheritance tax implications. This is a very useful exemption, but one on which the Government is clamping down, and so it is really important that you take advice in order to get it right.
The above is just a summary and other conditions and restrictions may apply, so please give us a call and we can guide you through the investment and legal process from start to finish.
Claire Read specialises in inheritance tax mitigation work, trusts, wills and probate. She is a member of the Society of Trust and Estate Practitioners.
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