Gifts to children

Gifts of cash usually only have IHT implications.

You and your husband can gift 3000 each free of IHT per year plus a further

Whether it is a good idea to give him all this money now is another matter. :)

Thank you for your reply.

Well, we do trust him but if we can give 12,000 in one year then there will be no need to drip feed it to him anyway, we can wait until the year he finishes.

Would such a gift not be "income" for the purpose of calculating his income tax?

Is this 12,000 the total we can give per year? Or can we give that amount to two people. One son will finish during the 2006 tax year, the other probably during

Kath

That is correct.

No. Although any income (e.g. dividends or interest) from the 12,000 would be his income for tax purposes - but he need not actually have to pay any tax, depending on his circumstances. It might be taken into account for any means tested benefits etc.

No. Everybody has a 3000 allowance p.a. But you can only carry forward this allowance from the previous year - hence the possible 6000. The 3000 is in total, not per person.

If you and your husband give 12,000 in 2005-06, then you would have to wait until 2007-08 to give another 12,000.

That's unlikely to be worthwhile. 1) If he invests money gifted by you, income over £100/per parent from that investment is taxed as if it were earned by that parent (you might need to check the specifics). 2) The investment would need to exceed loan interest rates after tax to be efficient (compared to simply reducing the loan). So (except for Student Loans which are at a fairly low rate*) paying off the debt is a safer tax free investment.

Last, the attitude of your children towards spending should be taken into account. If you think that paying off debt will simply lead them to spend up to their overdraft or loan limit it is probably a bad idea. Waiting until they are more financially stable (earning and starting to pay off debt on their own) might be more sensible.

Thom

• Inflation, I think.

Indeed. Nor, presumably, would the gift count as income for student loan payback purposes. They only need to be paid back once his income exceeds a certain level, isn't that right? Depending on what rate of interest, if any, is charged on the student loan, it may not be in his best interest to use the money to repay the student loan, at least not straight away, but could be used to replace lost income when repayments are actually made, or for any other purpose, like a deposit on a flat.

Not to worry, though. You don't have to give them the money two whole years apart, a year and a day will suffice. If son 1 graduates in summer

Of course, all these limits are irrelevant if you live for a full 7 years after making the gifts. You can in fact give as much as you like whenever you like with no income tax implications whatsoever. The only consideration is for inheritance tax, where gifts in excess of the limit will be treated as part of your estate when you die.

It may also be of interest that you can give, in addition to those £3k limits, as much as you like out of your income, provided it doesn't adversely affect your standard of living. If you have a combined income of, say, £60k, you can almost certainly get away with giving an extra £6k away per year no questions asked, especially if you'd only end up saving it instead of spending it on yourselves.

That only applies to minor children.

Thank you everyone your replies have been very helpful.

Kath

I just thought of something else!

Is the payout from the insurance policy subject to income tax? Its in my husbands name so does that mean he has to declare it and he'll have to give some (or lots) of it to the tax man?

I really should be better informed about such things! Can anyone recommend a dummies guide to personal finance and taxation?!

Kath

Impossible to be definitive without more data.

However, if it is a maturing qualifying life policy (and he is the original policyholder), then the proceeds should be tax free. No reporting to the IR is required.

You've missed out the fairly key point that it only matters at all if you plan on dying in the next 7 years :)

As far as I remember student loans are low-interest, so it may well be worth waiting as long as possible to pay it off and investing the money in the mean time. He is presumably old enough to put £3k a year in a cash ISA, which generally have the best rates and are tax-free once he starts earning enough to pay tax (IYSWIM). If he has other loans it's almost certainly a good idea to pay them off.

I think you'll find most deaths are unplanned.

Term life insurance ought to be pretty good way of compensating for any IHT which might fall due.

The policy was originally, in 1970, a Donor policy "Endowment Assurance by Donor for benefit of Child" from the Pru. The Donor was my husbands father and the original term 50 years. The life assured, my husbands

In 1983 father in law suggested we should be paying the premiums ourselves now and so a visit from the "man from the Pru" was arranged. On his suggestion the policy was changed also so that it matures next month which meant a premium increase. We have been paying the premium since that time and all correspondence regarding the policy is directed to my husband now.

How do I know if it is a "qualifying" life policy? And does the fact that it was originally a donor policy affect the position?

Kath

Thanks. I new someone would correct me if I was wrong!

Thom

I would suggest that you contact the Pru for their confirmation, in writing, that the policy is a Qualifying one.

Yes of course, thanks Doug, you've been very helpful.

Kath

Having gone through this stuff myself, I think the biggest problem (assuming the parents have money to give!) is retaining control over it should the "child" become a IV drug addict etc.

Any money given as described in this thread becomes the absolute property of the child, free to spend as he wishes, at 18.

Certain trust arrangements can be used (e.g. an accumulation & maintenance trust) to delay the handover of capital until age 25.

But there are tax issues. It is not possible to utilise the child's personal income tax and CGT allowances, while delaying the handover past age 18.

But control past 18 is pretty essential!! 25 is a much more reasonable age for large amounts of money.

For 4-5 figure amounts it is worth seeing a specialist and draw up a lifetime trust with suitably defined beneficiaries.

Then you have another problem: who gets the money if (god forbid) the kids predecease you. You can't just cancel an English trust and take the dosh out again.

And what happens if parents divorce? The standard informal method of saving for kids (an ISA in the name of a parent, for example) is not a good idea. My ex wife effectively confiscated a nice 5-figure amount in a "childrens' PEP" which was in her name, by forgetting it was meant for the kids (she knew of course, and anyway I reminded her)

So many things to consider. A lifetime trust is a good one to look at.

Another thing is that nowadays a child of any age can receive pension contributions, £2800/year or so. This is worth doing. Just make sure you go for a balanced portfolio, via a SIPP so you control where it is invested - not some with-profits fund with the like of Equitable Life :)