Planning your childrens' future starts now
There are various
ways parents can
provide financial assistance
for children,
but it is always
as well
to be aware
of
the tax consequences.
Income tax
The income of children belongs to them in their own right no matter how young they are. Parents can make gifts to their children and so as long as the income generated from such gifts in a year is less than £100 for each child from each parent, the income is taxed as the child’s and there are no further tax consequences.
However, if the income exceeds this limit the whole amount and not just the excess over £100 will be taxed on the donor parent where the child is under 18 and unmarried.
Inheritance tax (IHT)
In each tax year anyone can give up to £250 to any number of people, plus further larger gifts up to £3,000 in total. Regular gifts made out of income are not subject to inheritance tax and there are special allowances for gifts given in consideration of marriage. Most other gifts to individuals rank as potentially exempt, becoming fully exempt if the donor survives for seven years.
Trusts
Trusts can be useful in certain circumstances however the rules are complex and need to be considered carefully with the appropriate professional advice.
Tax Efficient Investments
THR Financial Services Limited can guide you on tax efficient investments that will help you prepare financially for your childrens' future.
What is the best way to prepare for future private education or university fees?
If you paid for your child’s private education out of your savings you would need to save around £400 a month from the day your child was born up until he or she turns 18* - an impossible task for most families! Therefore you should consider other ways of preparing for the cost of education, some ways of which are listed below:
- Negotiate a discount with the private school for paying up front or for sending a second or third child to the same school.
- Increase your return by using a tax-free investment vehicle such as an ISA to save for school fees due in the next 5 years or so, or consider fixed rate bonds if you don’t have much time left to save for school fees.
- Grandparents often help towards the cost of school or university fees whilst at the same time reducing their estate and ultimately their inheritance tax (IHT) liability. IHT is payable at 40% on estates worth more than £285,000 however every individual can make an annual cash gift of £3,000 a year which is free from IHT. In addition to the annual gift of £3,000, anyone can establish a pattern of giving out of excess regular income provided that the gift does not affect their lifestyle. Gifts out of capital that are above the limit are only free from IHT if the grandparents survive for seven years after the gift is made.
*Independent schools council’s 2006 census, Sunday Times November 2006