Charles de Lastic, Managing Director of Bluebond Financial Planning, explains some of the financial planning areas to consider when gifting money to your children. Charles is a financial adviser in St Albans.

As the inheritance tax (IHT) nil rate band is now frozen for at least 4 years, it seems that more and more people are considering gifting money to their children to avoid this tax and also to help their children onto the property ladder.

Credit is no longer easy to come by and lenders require large deposits and have much tighter lending criteria.  Many first time buyers find it impossible to make that first step without help from Mum and Dad.  At the same time, many Mums and Dads find themselves in the position where they are likely to pay large amounts of IHT and so passing it on to the children now rather than later seems a sensible approach. 

What should I look out for?

Gifting money could be sensible financial planning, however, you should carefully consider the following before giving your money away:-

• Are you certain your assets will continue to provide you with the income stream you require in your old age – especially if inflation gets a grip in the later years?
• What happens if the children get married and then divorced (52% of marriages now end this way)?  Will half of your gift walk away?
• What happens if your children get into a risky venture or are just spendthrifts and become bankrupt?

When dealing with this issue financial planning is essential.  You will need to consider your actual expenditure over at least a 5 year period.  This takes into account the costs of replacing cars, washing machines, house refurbishments and even the odd more expensive holiday.  Projections on different levels of inflation and performance on your investments should also be taken into account as well as the size of your emergency fund if it all goes wrong.

How can I protect my money?

The part of financial planning that should be looked into is the use of trusts to retain control of the money gifted by setting up loans to your children from a Lifetime Trust.  Pre- and post-nuptial agreements should also be utilized.  Providing these are set up, gifts may well be a prudent part of your long-term strategy for helping your children.

We even have some clients who insist that some of the payments from their trusts to their children are used to fund the children’s own annual financial planning meetings.  The purpose here being to ensure the children are making the best use of their money as part of a sensible financial plan.

A sound financial education may be the best gift you can leave your children.  It’s not much good giving them the money if they can’t manage it.  If you’d like more information on financial planning or would like to contact us for independent financial advice, please visit the Bluebond Financial Planning website.

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Charles de Lastic, Managing Director of Bluebond Financial Planning, explains why you may need further independent financial advice or specifically, tax advice. Bluebon offer Independent Financial Advice In Hertfordshire and the UK

As from the 6^th April 2010, the new ISA rules and allowances have come into effect.  This means that everyone over the age of 16 and resident in the UK for tax purposes can now save more, tax efficiently.

How much can I invest in an ISA?

The current limit (2010-2011) is now set at £10,200 of which up to half can be invested into a Cash ISA leaving £5,100 which can be invested into Stocks and Shares ISAs.  Alternatively, you can use the whole allowance for Shares.  You can of course use a lower amount in cash and put the difference up to the maximum allowance into shares.

If you don’t use your allowance by the 5^th April in the relevant tax year the unused allowances do not roll over and you lose them for good.  Any independent financial adviser would give the following tax advice – ideally, use your allowance at the beginning of the tax year and not the end, to get a whole years’ worth of extra tax free growth or interest.

How many ISAs can I have?

You can open one Cash ISA and/or one Share ISA in any tax year, provided you do not exceed your annual allowance.

What happened to Mini and Maxi ISAs?

Thankfully, all those complicated rules have now ceased and the investment rules have been simplified to allow you to use your annual allowance as you see fit.

Can I change my ISA provider?

You can transfer previous years’ Cash or Stock and Shares ISAs to another provider.  The tax advice would be to make sure that you do not withdraw the money out or the ISA allowance will be lost.  Instead, you should fill out a transfer form and your new provider will sort it out.  If you are in the habit of regularly transferring Share ISAs, you should consider a Wrap account or fund supermarket, as the cost of transfers will be much lower.

Should I always use an ISA?

For Cash ISAs, the tax advice is almost always yes, as tax is not levied on the interest you receive.  For Shares ISAs, be more careful as this is not always the case.  In many circumstances, when saving towards retirement, pensions may be better tax advice as they may be more tax efficient and pensions offer a wider range of investment choice.  In retirement, or if you are seriously ill, you should also consider Inheritance Tax as ISAs fall into your estate on death.  There is no point making a small amount tax efficiently, only to have your children pay out 40% to the taxman on your death.

That being said, using an ISA allowance every year can mean you build up a large amount of tax efficient investments over the years.  For Cash ISAs the tax efficient growth is well worthwhile and in many cases you can obtain higher rates than most deposit accounts.  For Shares ISAs, to my mind, it’s not the tax efficient growth that is important, as much as the fact that a tax free income can be produced from the investment for many years.  This is especially useful for people who are likely to be higher rate tax payers in retirement.  However, if you do use the allowance every year, be sure to diversify your investments properly.

Good independent financial advice, suitable tax advice and a proactively managed portfolio are essential.

You can contact Bluebond Financial Planning via our website if you’d like more information on the potential benefits that individual tax advice can offer you.

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