The Bank of Mum & Dad
In its ‘Bank of Mum and Dad’ Report 2018, Legal & General predicted that 27 per cent of UK housing transactions would rely on a parental cash injection, and in the capital 41 per cent of buyers had financial help from family members.
As part of an overall financial plan, knowing your goals for you and your children and starting early to achieve them will give you the best chance of success. My parents helped me with my first house deposit, and my goal to give the same opportunity to my daughters.
So, what are the options? You may want to save into an investment in your name, giving you control over the distribution of the funds. There is however the risk of dipping into these funds for your own purposes or in times of difficulty which would diminish what you want to achieve.
If grandparents wish to invest for their grandchildren, inheritance tax may be a consideration. If friends or family wish to save as well, then you might prefer an investment in the child’s name.
Junior ISA (JISA) / Child Trust Funds (CTFs)
Junior ISAs and CTFs can both be held in cash savings or be invested. They both benefit from tax-free growth and can receive up to £4,368 this tax year. CTF’s were accounts for children born between 1st September 2002 and 2nd January 2011 and were used to deposit free cash vouchers from the government. If you have a CTF you can’t open a JISA unless the CTF is transferred into it. The money is locked away until the child is 18 but at that point it becomes theirs. Bear in mind that a rebellious 18 year old may not share your plans for the money and you will not have control over how they spend it.
Talking about pensions for children may seem odd, but as our life expectancy is increasing there is a need to prepare for a longer retirement. Assuming your child has no income, you can invest up to £2,880 per year (£3,600 after tax relief). This money is locked away, usually until minimum pension age which is currently 55. Starting a pension for your children can help engage them in the concept of long term saving. It prevents early and potentially frivolous access but would also mean it was not available for needs which arise earlier in life, for example, a house deposit.
If parents or grandparents have a lump sum to invest, then an investment bond may be a good option. You can write a bond into a trust which can have several benefits. Gifts in excess of inheritance tax allowances would be exempt from IHT after 7 years under current rules. You could also set the trust up so that the trustees have discretion over when, and how much they distribute. This could be earlier than 18 if necessary or given in smaller amounts. Setting up a trust and the tax treatment of bonds is more complicated and using the right investment structure is important. Professional advice should be sought if this is something you are considering.
If you have older children/grandchildren and are looking for an investment that specifically targets the purchase of a first home then a Lifetime ISA could be an option to consider. A LISA is available to those aged from 18 to 39 and allows contributions of up to £4,000 per year. The government gives you a bonus of 25% of the contributions, so up to £1,000 per year so long as this money is used to buy your first home or for retirement. If you withdraw the funds for any other purpose, or the house is not your first home then there is a 25% charge on the current value. This charge will be more than the bonus you received. Contributions to a LISA also count towards your overall ISA allowance of £20,000.
Please note, the value of investments can fall as well as rise. You may not get back what you invest.
This article shouldn’t be taken as financial advice and is based on our understanding in July 2019