From pocket money to private school fees, the financial impact of having children ranges from the small to the substantial. But other than the everyday expenses, how else can your bundles of joy affect your purse strings?
Saving for their future
There’s no doubt parents want the best for their children. We might want to provide them with things we never had. So when you think about the future of your family, what do you see?
Do you want to send them to private school, support them through university or help them get on the property ladder?
To give your offspring financial freedom, you can open a Junior Individual Savings Account for a tax efficient option for them. They gain control of the account when they turn 16, but they can’t withdraw any money until they’re 18. This also allows family to gift money to your child if they want to.
It’s not just the teenage years that can be taxing
It’s frequently reported that millennials are consistently borrowing from the ‘bank of mum & dad’1 . So if you do help out your offspring, what are the tax implications?
Inheritance tax (IHT)
Giving away more than your annual IHT exemption of £3,000 (that’s in total, not per person) and other tax free gifts could mean extra tax if you die within seven years of making the gift.
There could be a liability for inheritance tax if your estate value and ‘failed’ gifts exceeds the threshold of £325,000 and a new Residence allowance is now available too. The Residence Allowance is £125,000 in 201819 to offset the sale of a family home on death.
If tax does become due on a gift, the person who received it will normally be asked to pay the tax. However, the tax on the gift can potentially be reduced because of ‘taper relief’ if the gift was made more than 3 years before the date of death.
Income tax
If you lend your children the money, then if they pay you interest, this is taxable.
Capital gains tax (CGT)
Where parents buy a house with their child, and don’t live with them, then when the property is sold, they could be liable for CGT. The property will not count as the parents’ main residence for tax purposes, and so CGT is payable on their part of the proceeds on sale.
Additional stamp duty
Helping out with the deposit for a child’s property may not pose a problem (apart from finding the money), but partowning can mean additional stamp duty is payable. If parents buy a property for their child and are named on the deeds and already own a home, this purchase counts as a second home and may be liable to stamp duty at the higher rate.
Protecting what really matters
The joys of being a parent also come with the added responsibility and, at times, worry. Where you may have once just had to worry about supporting yourself and possibly a partner, having offspring changes your priorities.
Protecting your family means more than keeping them safe. It’s important to regularly review your life insurance and income protection policies so that they reflect your real needs, your circumstances and the people you want to protect.
Making the right decisions for you
Any decisions you make about your finances will be affected by our own circumstances. If you’re interested in any of the topics I’ve mentioned, it’s best to seek some advice.
A good financial adviser will help you balance what you need now and what you want for later. They will empower you to make informed decisions for your family’s future.
Need more advice?
1 http://www.thisismoney.co.uk/money/bills/article5838781/MorehalfmillennialsreceivemoneyBankMumDad.html
Shane Presley is a Chartered Financial Planner for Lloyd & Whyte (Financial Services) Ltd. It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding of taxation and can be subject to change in the future. It does not provide individual tailored investment advice and is for guidance only. We cannot assume legal liability for any errors or omissions it might contain.