– Tax Free Ways to Invest –
With a carefully selected financial donation, generous grandparents will get their grandchildren off to a great start in life and some even come with an extra boost from the taxman. Below is a list of Tax-Free ways to invest in your Grandchildren in 2021.
Also, grandparents are keen to contribute to the investments of grandchildren as a way to pass money down the generations and save cash.
Cash may appear to be the cheapest option with guaranteed returns, but there is a risk that interest does not meet inflation.
A child is not going to lose money but in the future, they may be able to buy less with the fund than they could today.
Tax-Free Ways to Invest in Your Grandchildren
Opening a Savings Account for a Grandchild
If you want to give your grandchild a gift that is not going to break or become boring, how about a savings account for children?
Many children’s accounts have an interest rate significantly higher than ordinary accounts. Opening up an easy access account at a local bank or building society will help teach the financial facts of life to your grandchildren.
They should motivate the children to spend some of their pocket money and cash for birthdays, remind them that they can purchase bigger things by saving up, and point out that when they get interested – their money is making money.
Grandparents can open a savings account for a grandchild provided they bring appropriate proof of identity such as a birth certificate.
Interest on the child’s account won’t be taxed if the money comes from a grandparent – unlike money given by a parent when any interest over £100 a year is tax as if it was earned by the parent.
Junior ISAs and Child Pensions
Generally, the primary aim of investing in a child is to have a nest egg to help them out financially in later life.
Nonetheless, there are other incentives that may see a substantial decrease in the amount of tax that has to be charged both now and in the future.
The best way to mitigate tax is to use a tax-efficient scheme such as a Junior ISA or child pension such as the Junior SIPP. Because the savings are kept in the child’s name, parents are not responsible for taxes either.
The laws are likely to adjust over time as in all things tax. The benefits will depend on the child’s specific circumstances and on the person who pays into the child’s account.
Child Tax Rules and Gifting
Investment beyond a Junior ISA or SIPP is taxable. One solution is a legal agreement which we give through our Junior Investment Account called a bare trust.
The assets are not kept in the child’s name but are taxed as if they belong to the child-therefore, it is important to recognize the child’s tax status and also the person who contributes money to the account (the donor).
The Child’s Tax Position
Most children can ‘earn’ up to £ 18,500 a year without tax (personal allowance of £12,500, starting rate for up to £ 5,000 savings, and £1,000 personal savings allowance).
The full starting rate for savings will only be available if there is less than £12,500 in revenue other than savings income (e.g. dividend or employment income).
If this ‘other income’ is above £12,500 so for every £1 of ‘other income’ above that level £1 of the starting point for savings will be lost. When the ‘other profits’ contains dividends then there is also a tax-free dividend allowance of £ 2,000 available
They will have a Capital Gains Tax (£12,300) allowance as well. This means that while their investments may be taxable, there is often nothing or very little to pay. The numbers quoted apply to the 2020/2021 tax year.
The Donor’s Tax Position
Based on money provided to them by each parent will children benefit from an income of up to £ 100 per annum. Unless they earn more, the parents must pay tax at their full rate on all interest or dividends.
If such problems occur then the capital has been donated by a grandparent, other relatives, or family member. Only interest or earnings would be taxed over the child’s personal allowance.
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Helping with a Property Deposit
First-time buyers are paying an average of £231,455 for a home, according to Halifax’s latest figures. Typical first-time investor deposit sizes across the UK vary from an eye-watering £109,885 in London to a modest £24,091 in northeast England.
Helping with a deposit by lending money or even giving it to grown grandchildren would mean lower monthly mortgage repayments and give them a good start on the ladder of the house.
Family handouts may be the secret to getting them the house they really want.
When you don’t think when the time comes you could afford a lump sum, putting money back into a savings account or Junior ISA will really help them.
There’s the option to save in a Lifetime ISA (LISA) for grandchildren or adult children aged 18-39.
This is a special kind of ISA that lets individuals save up to £4,000 every tax year towards a first home (or retirement), with the government adding a 25% bonus on top of what you save.
Should you max out the limit each year, there’s a free £1,000 on offer. Plus you earn interest on whatever you save, and as it’s an ISA, that interest is tax-free.
A LISA would need to be open by the individual, but you could provide the monthly cash.
The money is only for those who haven’t owned a home before, however.
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