If you are able to help your children or grandchildren without risking running out of money yourself, it’s important that you do so effectively.
According to analysis by the Resolution Foundation, 58% of the UK’s personal wealth – being savings, investments, pensions and property – is held by those aged 55 or over. More strikingly, less wealth is in the hands of all under-45s than those aged between 65 and 74.
Rising house prices have created wealth for many homeowners and landlords, having doubled on average across the UK over the past two decades even after taking into account the effects of inflation. In some parts of the country, the increase has been much more acute.
As property prices have outpaced wage growth, buying a home has become more daunting for many. By one measure, houses are half as affordable as 20 years ago. In England, the median house price in 1997 was 3.5 times greater than median annual salaries. By 2017, it was 7.8 times greater.
Getting a foot on the property ladder is also more expensive than ever. The average price paid by first-time buyers in 2018 was £208,741, according to Halifax. The average deposit for first-time homebuyers was £33,127 across the UK. In London, it was £114,952.
Before that, your children or grandchildren may have the generational misfortune to face tuition fees of up to £9,250 a year if they choose to go to university – barely two decades since it was free to study.
According to the Institute for Fiscal Studies, students now graduate with average debts of roughly £50,000. While student debts only need to be repaid on earnings above a certain amount, the interest rates on loans taken out since 2012 can be as high as retail price inflation plus 3% – in September 2018, interest on student debts rose to a maximum of 6.3%. It is easy to see how repayments could place a heavy burden for years, if not decades, after graduation.
Lending a helping hand
If you have chosen to offer your family support, it could make sense to make your gift sooner, rather than later – and not only because it will hopefully allow you to enjoy watching your money help loved ones pursue their goals.
Admittedly few taxes are popular, but inheritance tax can be especially divisive. Above a tax-free allowance, known as the ‘nil-rate band’, up to 40% of your estate could be liable for inheritance tax.
However, gifts that you make can be exempt from inheritance tax – however large – if you outlive them by at least seven years. Irrespective of what might happen, you can also give away up to £3,000 tax-free in any tax year, according to current rules.
Weddings – often expensive affairs in themselves – can also be an excellent opportunity to be generous without having to worry about the possible tax implications. The first £5,000 of any wedding gift to a child will be exempt from inheritance tax. For grandchildren, this tax-free allowance is £2,500, and for anyone else it is £1,000.
Remember that tax can be highly complex and specific to your personal circumstances, so it could prove valuable to consult an expert for independent advice. Tax rules are also subject to change over time.
Gifts for their future
If you’re looking to build a nest-egg for a child to prepare them for the financial challenges of early adulthood, there are compelling reasons to take a long-term approach.
Investing early for a child’s future, with the capital locked away for as long as 18 years, gives your money longer to work to deliver returns that can then be reinvested until the money is needed.
It is important to remember that the value of investments, and the income from them, will fluctuate and you may not get back the original amount you invested. While investing necessarily introduces risks, it also opens up opportunities for greater returns over the long term.
Saving money in cash may seem like the safest option – up to £85,000 of your money is safe in a bank or building society as it is covered by the Financial Services Compensation Scheme – but over time rising prices can erode its value unless bank interest rates exceed the rate of inflation.
When investing for children, it is worth considering the advantages of Junior ISAs (individual savings accounts). When children come to liquidate their investments, whether they are 20 or 30, all capital gains will be tax-free irrespective of their circumstances – allowing them to make the most of your gift to realise their ambitions.
When you're deciding how to invest, it's important to remember that ISA and Junior ISA tax rules may change in the future and their tax advantages depend on your individual circumstances.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
We are unable to give financial advice. If you are unsure about the suitability of any investment, speak to your financial adviser.