When it comes to intergenerational planning (IGP) and making gifts into investments for children there are three main pillars to meeting the clients objectives. Tax efficiency, access and control.
There are other factors that will need to be considered such as the level of contributions and fund choices before finalising a decision but fundamentally these three pillars are the starting point.
Tax
IHT planning and IGP go hand in hand. In fact 17% of those interviewed as part of M&Gs Family Wealth Unlocked (FWU) report 2022 said reducing IHT was one of the motivations for gifting money to children/grandchildren. However, tax efficiency should be at the core of IGP even for those who don't have an IHT problem as passing on wealth creates opportunities to make use of tax free allowances and tax favoured products that may not currently be getting used, particularly for minor beneficiaries.
Access
There may be age restrictions on when withdrawals can be taken with some investments. Therefore an understanding of when withdrawals are likely needs to be considered.
An understanding of the level of access required will also be key as there could be tax implications when taking withdrawals, particularly if large withdrawals are required.
Control
This is different from access even though age restricted access provides an element of control.
When it comes to control it's about the overriding power to decide when the beneficiary will receive the money and for some the flexibility to change the beneficiaries. And the only way to do this in conjunction with an outright gift is hold the investment in a Discretionary Gift Trust.
With these three pillars in mind let's consider some investments solutions available from M&G Wealth that might be suitable for clients wanting to make gifts into investments (not cash) for the benefit of minor children.
Junior ISA (JISA)
Available via M&G Investments and M&G Wealth Platform.
An option for those with gift amounts of no more than the current tax year JISA limit of £9,000 per child. This is the combined limit for both types of JISA e.g. if you contribute £9,000 to a stocks and shares JISA no contributions can be made to a Cash JISA for the same child that tax year. The account must be opened by a child's parent or legal guardian but contributions can be made by anyone.
Family linking is available through the M&G Wealth Platform which means the whole families portfolio values are consolidated to calculate the Group Annual Platform Charge and charges applied proportionately. Family groups includes spouse/civil partner, children, parents, grandparents and grandchildren.
Tax - Investment returns are tax free as are withdrawals so a tax efficient outcome. Smaller contribution amounts could be IHT effective where within the annual exemption. The normal expenditure out of income exemption could also be used.
Access - Withdrawals are not permitted before the child attains 18 except in limited circumstances e.g. child diagnosed with a terminal illness.
Control - The JISA belongs to the child. They can manage the account from age 16 and take full control when they reach age 18. If the child dies the funds are payable to their personal representative.
Summary - The JISA ticks the box from a tax planning perspective but if the client wants to use the funds for the beneficiaries benefit while they're a minor or they want to control how the funds are invested and distributed beyond age 18 then a JISA won't meet their access and control objectives.
Pension (for children)
Available via Prudential Retirement Account.
An option for those looking to build a pension pot for their children/grandchildren. Maximum net relief at source contributions of £2,880 per child. Although there may be some exceptions where higher contributions are possible if the child has relevant earning e.g. a child actor or YouTube star!
Tax - Due to the lower gift level there's often an immediate IHT savings if the gift is exempt (by making use of the £3,000 annual exemption or normal expenditure out of income exemption). A £2,880 exempt gift is an immediate IHT saving of £1,152. The tax benefits don't stop there.
£720 basic tax relief will be added by HMRC so the pot immediately grows to £3,600 and there's no tax on investment returns while the funds are held in the pension.
On exit there will be tax considerations. Only 25% of the pot can be withdrawn tax free assuming lifetime allowance available with the balance subject to income tax at the beneficiaries marginal rate. However, with careful planning it is possible (e.g. drawdown strategy) to manage pension income tax efficiently in the right circumstances.
Access - Restricted to minimum pension age which increases to 57 from 55 on 6 April 2028 but for a minor child now, the age could change again.
Control - The pension belongs to the child and they take control from age 18. This includes nominating who benefits from the money should they die before using it. Many will be comforted that the child will only be able to spend when they reach their mid to late 50s.
Summary - When you factor in the potential IHT savings (for some clients), tax relief on entry, tax free investment returns on the journey and the ability to manage the income tax on withdrawal the pension certainly ticks the box from a tax planning perspective. Therefore access and control will be the two key factors. Does the client want the beneficiary to benefit at an earlier stage in life or are they happy to restrict access until later life to help build a retirement fund?
Offshore bond held in a Discretionary Gift Trust
Available via Prudential International Assurance.
An option for those with higher levels of gifts in mind. Flexibility for your client to choose the number of policies for their bond, up to 9,999 (min investment amount £20,000, min £200 per segment/policy).
Tax - No tax on income received and gains made but chargeable event gains subject to income tax. However, with careful planning it's possible to achieve a tax efficient exit by ensuring gains are taxed against the beneficiary while they're a non-taxpayer or have savings allowances available. This strategy involves assigning segments to them when they're adult but a non-taxpayer so that gains can be crystallised within their available starter rate for savings, personal savings allowance and personal allowance.
In the current tax year gains of £18,570 could be crystallised without creating a liability to tax assuming the beneficiary has no other income sources.
If funds are required while the beneficiary is a minor then segments could be appointed absolutely so that gains are assessed against the beneficiary but this strategy only works if the settlor(s) are not the child's parent. If it's the parent that is settlor the parental settlement rules apply and gains above £100 will be taxed against the parent until the child reaches age 18.
Access - There's no age restrictions on accessing the funds. Tax will be a factor when taking withdrawals but this can be managed tax efficiently as explained above. The trustees can also withdraw up to 5% of the original investment each year (ongoing adviser charge withdrawals count towards this limit) without triggering a chargeable event for income tax purposes.
Control - Unlike the JISA and Pension options the Discretionary Gift Trust allows for multiple beneficiaries within the one arrangement and the client (settlor) can add or remove beneficiaries. The trustees have full discretion on who benefits and when so this solution is ideal for clients who require flexibility on when to make distributions to their beneficiaries.
Overview - so which option is best?
There's no one size fits all solution!
Tax efficiency can be achieved with all three options with careful planning but access and control are likely to be the deciding factors.
As our FWU report highlighted 22% of the older generation wanted to see their beneficiaries enjoy the money, so a JISA could an appropriate solution for them if they are not concerned about the beneficiary having full access and control from age 18.
10% of gifts related to paying university or school fees. Therefore if the client is a grandparent and wants the flexibility to use the funds gifted to support school fees while the beneficiary is a minor or help them while at university, then an offshore bond in a Discretionary Gift Trust could provide them with the access and control they need but also a tax efficient journey and exit with careful planning.
21% said they were concerned that gifts might be squandered ahead of time so for clients who are concerned about their children or grandchildren building funds for retirement, then contributions to a pension where access will be restricted until minimum pension age could be the right solution.
Whatever the clients objectives, using the three pillars of tax, access and control will help you make a decision on what solution can best meet your clients objectives. Although depending on the client perhaps a combination of all three of the above investment strategies could be adopted.
Download a copy of the Family Wealth Unlocked report here.
This post is funded by M&G Wealth
