The arrival of the latest Royal Baby is likely to give a welcome boost to the UK economy, and no doubt many of us will contribute to that, even if only by raising a glass in a toast to Harry and Meghan. Congratulations!
The Duke & Duchess of Sussex are unlikely to have any concerns regarding the financial security of their new arrival, but for the rest of us, a new baby, whether you’re a parent or a grandparent (or even a godparent) is an event which should prompt a review of financial and legal arrangements:
We have listed some considerations to make:
- Tax Free Personal Allowance – Children have an annual tax free personal allowance, currently £12,500. This can usefully cover income from investments (see below), and produce tax repayments.
- Money from family – Many banks have specific children’s accounts, usually with a higher rate of interest, for investing gifts from family members. Interest can be earned tax free where your child is not using their personal allowance. However, if £100 or more of income is produced from capital gifted by a parent, then that income is assessable on the parent and not the child.
- Shares – Can be held on behalf of children, either in trust (below) or directly. Dividends of up to £2,000 per child can be received tax free.
- Trusts – Can be useful for holding investments for children until a specified age, whilst keeping the income under the control of the trustees. Although the trust will pay tax itself, any money paid out comes with a tax credit attached, potentially creating a repayment for the child (but note that the £100 rule still applies where parents settle funds).
- Junior ISAs – Replacing the old Child Trust Funds, any child not eligible for a CTF can now hold a Junior ISA. Anyone can pay into the ISA, up to a maximum of £4,368 per year. The money is locked in until a child turns 18, meaning that the interest generated is not subject to the £100 rule.
- Pensions – Kick start a child’s pension early by investing up to £3,600 gross per year (£240 net per month) on their behalf. Pension rules allow anyone to start a pension for a child.
- Premium bonds – Can be held on behalf of children. Gifts of investments can be made to a child up to a maximum of £50,000 and any prizes are tax free.
- Tax credits – Are you claiming everything you’re entitled to? We don’t tend to deal directly with Tax Credits, but HMRC have a useful tool on their website for calculating any credits due, and we’d be happy to point you in the right direction.
- Child Benefit – Can be claimed for each child, but take care – if either parent’s income is over £50,000, the benefit will be clawed back through their tax return.
- Tax Free Childcare – Since the abolition of the childcare voucher scheme for new entrants, a new initiative allows working families to access up to £2,000 per child per year in tax free childcare, provided your income is between £125 and £100,000.
- Wills – Are your Wills up to date to include provision for your children?
- Life cover – Would your family manage without your income? If not, is your current life cover sufficient?
- School fees – You could be putting money aside now to cover future school fees. Consider tax efficient investments such as ISAs or trusts.
- IHT Exemptions – Are any family members planning to reduce their estates for IHT purposes? Up to £3,000 per annum can be gifted without any IHT implications and a number of other exemptions are available.
- Property – Are you considering purchasing property for your child to use whilst at university? Although profits are taxable, renting creates a source of income until the property is required. Once at university, if the property is in the child’s name, tax reliefs are available for renting out a spare room and on sale of the property.
If you’ve welcomed your very own Prince or Princess into the family recently, and you’d like to discuss any of the above for your children or grandchildren, please contact your usual Campbell Dallas advisor or call 0131 440 5000.
This is a general guide which is intended to give background information and is not a substitute for taking specific advice based on your particular circumstances.