The Making of Millionaire Children Through Clever Tax Planning?
This week we’re going to take a look at saving for children – the options available and how these can work for a parent’s estate planning. This will be of interest to those studying for any of the CII AF1, R01 or R03 exams.
This article is relevant to examinable tax year 2016/17.
Questions often come up on this topic in a variety of exams from simple multiple choice questions through to more complex areas of portfolio planning found in exams, such as the CII’s AF5 Financial Planning Process exam.
Making the most of tax allowances and choosing tax efficient investments is part of the financial planning and investment advice process, and this, of course, includes estate planning. With the various schemes on offer to help children with their financial futures, it made us wonder how these can be combined with a parent’s inheritance tax problem.
The first product on offer is, of course, the well known Junior ISA – these work like ordinary ISAs in that all income and capital gains are tax-free. Children don’t usually pay tax, so the main advantage comes when parents make maximum use of the annual subscription; with a Junior ISA, the parental settlement income tax rule doesn’t apply.
The annual contribution amount is lower than a normal ISA; this tax year the limit is £4,080 (or £340 per month). At 18, the investment belongs to the child (which means they can do what they like with it).
Help to Buy ISAs
Another type of ISA, which is often overlooked for older children is the Help to Buy ISA. This ISA is for the over 16s and is available up until 30 November 2019 to help the next generation save for a house deposit. The government tops up savings by 25%, so for every £200 saved, the bonus is £50. The most we can squeeze out of the government is £3,000, but this should not be sniffed at, and anyone eligible to apply for one of these products probably should. You should note however that it must be opened in the child’s name, and they must be at least 16. The bonus 25% must be claimed by 1 December 2030. Even if the child doesn’t eventually use the money to buy a house, the savings can be accessed for other things; although, the government bonus won’t be paid, as this goes straight to the mortgage lender. The initial contribution amount is up to £1,000, and then the maximum is £200 per month. If you miss paying in the £200 one month, it cannot be rolled over to the next.
Only one Help to Buy ISA can be opened each year, unlike a normal ISA, which can be opened each tax year. Also, you can’t open a Help to Buy ISA and a normal Cash ISA in the same tax year, but some providers are combining the products in one wrapper with the standard limits applying to both.
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Set Up a Pension
The next thing to consider is a pension for our children. The maximum gross amount that can be paid each year is £3,600, so the net contribution from the parent is up to £2,880 a year or £240 a month. Imagine how much could be in the pot when the child eventually reaches retirement age!
Finally, if someone still has surplus cash, they can make gifts to reduce their inheritance tax bill. The annual allowance is £3,000 per year, so this could be given without any immediate inheritance tax consequences and will reduce someone’s estate over the long term. The monthly amount to make use of this is £250.
Grab the resources you need!
If you’re studying for your CII R03 exam, and you’re anxious about how you’ll do on exam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the R03 calculation workbook taster now!
Over to You…
Do you have a plan for your child’s financial future? Do any of the above options make up part of your plan?