Given current life expectancy, if everybody just handed down their family wealth to the next generation at death, hardly anyone would receive a financial boost until they were well into middle age. The Chancellor would be smiling, because he could have an opportunity to collect inheritance tax from every generation. Thus, some people skip a generation with their bequests, so that grandchildren benefit at a younger age and the Chancellor is denied a full, juicy bite of the IHT cherry when the next generation departs.
Leaving assets in a will, whether to the next generation or the one after, is clearly not the only way to help younger members of the family at vital lifestages. We all have to consider our own financial needs in old age but, for many people, it is not a problem to start divesting some cash in the children’s favour, with future university and homebuying particularly in mind. Within annual limits, this can take the gifts out of any IHT calculation and survival for seven years takes larger gifts out as well.
Upcoming generations face a barrage of financial challenges: tuition fees, youth unemployment, house prices and much more – including their own eventual pensions – whilst also threatened, as future taxpayers, with paying towards public sector pensions and medical and care costs for an older generation that already holds a lot of Britain’s private wealth. Homebuying is a really big issue. First-timers often have little hope of buying unless their parents are able to help with a major contribution to the deposit.
Tax breaks like other ISAs
A tax-efficient way to build up capital for when a child reaches adulthood, giving them the chance to take some responsibility for their own finances, is through a Junior ISA. These were launched in November 2011 as successor to Child Trust Funds, which included contributions from the Exchequer. Junior ISA’s do not have that benefit, but they allow up to £3,600 per annum to be invested in cash or stocks & shares, with tax breaks similar to existing ISAs. Parents, plus other relatives and friends, can help youngsters to a tidy sum at the age of 18.
An adult ‘registered contact’ with parental responsibility may open a Junior ISA for a child under 18 who is living in the UK and does not qualify for a Child Trust Fund. A child may have both a cash and stocks & shares Junior ISA and anyone can put money in, but total funds added must not exceed £3,600 per child in any tax year. Children over 16 may open and manage their own accounts. Directgov suggests: “getting financial advice if necessary” when picking an ISA. Parents of children born between 1 September 2002 and 2 January 2011, thus qualifying for a Child Trust Fund, should take advice before any unused voucher for the Government contribution expires.