A new tax year means you could be in need of some tax tips. Fear not, for MoneyWeek has you covered.
On an individual level, it’s a good idea to stuff some cash into an ISA, or do a Bed & ISA, to save on your tax bill. But how can the Bank of Mum and Dad - or Bank of Grandma and Grandpa - maximise their money for their children or grandchildren?
Those wanting to gift money to their kids or grandkids should think about inheritance tax implications and how they invest for their family’s future. You could also make contributions to your kids’ or grandkids’ pensions each tax year, giving them a head start in building a decent nest egg for later life.
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“Every family’s circumstances are different, but it’s important to remember that the tax system does offer some attractive incentives for long-term saving, both for you and your children or grandchildren,” says Paul Falvey, tax partner at accountancy and business advisory firm BDO.
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Here are four tax planning tips to follow when gifting away your money.
1. Use your inheritance tax annual exemptions
Inheritance tax (IHT) is becoming a headache for more and more families. The tax take from April 2023 to February 2024 hit a record high of £6.8 billion.
Each tax year, you can give away a total of £3,000 worth of gifts without these being added to the value of your estate. You can either gift £3,000 to one person or split it between several people.
This allowance can be carried forward for one tax year, which means up to £6,000 can potentially be gifted in a lump sum free from future IHT liabilities. For a couple, those figures double, with up to £6,000 per couple per tax year and up to £12,000 if the allowance is carried forward for a year.
Under the small gift allowance, you can also give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.
2. Boost their junior ISAs and lifetime ISAs
In the 2023-24 tax year, you were allowed up to £20,000 across adult ISAs, such as cash ISAs and stocks and shares ISAs. This allowance is refreshed for the new tax year.
If you’ve used up your allowance, there is no restriction on you paying into someone else’s ISA to help them benefit from tax-free savings as well.
If your child or grandchild is aged between 18 and 39, you could consider making a contribution of up to £4,000 to their lifetime ISA to help them get onto the property ladder. The government adds a 25% bonus to the savings up to a maximum of £1,000 per year.
Parents or guardians can also open a junior ISA for children under 18. Once the account is open, other people such as grandparents can top up the pot. For the current tax year, the savings limit is £9,000.
Parents manage the account, but the money belongs to the child. The child can take control of the account when they turn 16 but cannot withdraw the money until they reach 18 so it can be a good way to save towards university costs.
Falvey comments: “People considering paying into their child’s or grandchild’s ISA should also consider the IHT implications. Outside of the allowances mentioned above [in tip 1], the donor will need to survive for seven years to be most efficient for IHT purposes.”
According to the investment platform AJ Bell, someone who saved the full £9,000 each year from birth, who saw investment returns of 5% a year, would be handing their child a pot worth £266,000 on their 18th birthday.
Even if you’re starting a bit later, when your child is older, and paying in a smaller amount, you can still build up a decent pot: £100 a month saved from their 10th birthday gives them a pot worth £12,000 by the age of 18.
3. Help secure their future with a pension contribution
Cash gifts can also be made into children’s or grandchildren’s pensions.
You can usually pay a maximum of £2,880 a year into a child’s pension and, with government tax relief, this sum is boosted to £3,600.
Alice Haine, personal finance analyst at the investment platform Bestinvest, comments: “It might not be something a child thanks you for now, but a sum of £2,880 invested every year in a junior Sipp [self-invested personal pension] would mean total contributions of £51,840 over 18 years, topped up by £12,960 of tax relief. Factor in investment growth and the value of the pot by retirement age is likely to be substantial.”
However, a parent could contribute larger sums by opting out of paying into their own pension and contributing to their child’s nest egg instead. According to BDO, if a parent earning £60,000 a year paid £10,000 into her child’s pension fund, even though it is the parent making the donation, it would be the recipient who would benefit from the tax relief. So a £10,000 donation into the child’s pension fund would immediately attract 20% tax relief at source, providing the recipient with an extra £2,500 available to invest.
But because the parent is a higher-rate taxpayer, the recipient would then receive higher-rate tax relief on the pension contribution, equivalent to £1,964. This would need to be claimed on a self-assessment tax return.
Your pension allowance (£60,000 or 100% of your earnings, whichever is lower) will have finished on 5 April 2024, although any unused allowance may be able to be carried forward into the new tax year.
As with the ISA contributions, do consider the IHT impact of paying money into a child’s pension. Outside of the IHT allowances mentioned above, the parent will need to survive for seven years to be most efficient for IHT purposes.
4. Get your child benefit back by paying more into your pension
This tip isn’t strictly about giving your child a financial gift. However, if you manage to get your child benefit back, you could give this to your child as pocket money. Or, if not, at least it will be more disposable income to spend on snacks, clothes and the never-ending list of kid-related purchases.
Dean Butler, a managing director at Standard Life, comments: “Worth a little over £2,600 a year to a three-child family, child benefit is reduced by the high-income child benefit charge when one parent’s income reaches £50,000. At £60,000, the tax charge cancels out the benefit entirely. But there is a way you could get some or all of it back if your earnings are in this range.
“Paying into your pension reduces what counts as your income, and it could allow you to keep your child benefit and boost your pension savings at the same time.”
Currently, child benefit begins to be withdrawn when one parent earns more than £60,000 a year. The top of the taper at which the benefit is withdrawn completely is £80,000.
If you are affected by the high-income child benefit tax charge, we explain how to boost your child benefit with pension contributions in a separate guide.
