Passing on your investments

13/06/2019

We all know that the best investments are long-term. Arguably the ultimate investment we can ever make is in our family and friends.

Glossary

For explanations of the investment terms used throughout this article.

View the glossary

These investments go far beyond the financial, of course, but that is often an important pillar of the support we can offer. After all, we all know how expensive life can be, especially at certain times: from paying school and university fees, to buying a car or home.

Welcome financial support can come in many forms. If it is a lasting leg-up, rather than a one-off boost, that you want to offer your loved one, one option might be to pass on investment assets that you have.

Gifts with potential

While you could simply pass on your gift as cash, there could be good reasons to consider signing over an investment intact.

Up to £85,000 of your money is secure in a bank or building society through the Financial Services Compensation Scheme, unlike stocks and shares or fixed interest investments which are less secure.

Aside from wishing to endow younger generations with some financial assets behind them – and perhaps inculcate the spirit of investing money for their long-term future – there are other, pragmatic reasons why passing on an investment could be worthwhile.

Depending on your circumstances and stage in life, certain investments might, in short, be better suited to your children or grandchildren.

An investment strategy should match your investment time horizon. It follows that a fund taking a very long-term approach to growing capital would usually be a better fit for someone whose financial goals are equally long-term and who can ride out any prolonged periods of market uncertainty.

When it comes to investments for a child, in particular, their time horizon means you can focus squarely on pursuing long-term capital growth for them – maximising the potential value of their investments for when they come to need them – rather than worrying about day-to-day fluctuations in market values.

Of course, the suitability of any investment should always be properly considered in light of an individual’s circumstances and attitude towards risk. If you are unsure about how suitable an investment might be for a loved one, you should consider seeking independent financial advice.

Reasons to plan ahead

If you have chosen to offer your family support by passing on investments, it could make sense to start planning your gifts sooner rather than later. This way, you can make tax rules work to your advantage.

A key factor here is inheritance tax. Above a tax-free allowance known as the ‘nil-rate band’, which currently stands at £325,000, your estate could be liable for inheritance tax – payable at up to 40% by your heirs.

Importantly though, gifts that you make can be exempt from inheritance tax – however valuable they are – if you outlive them by at least seven years. Irrespective of what might happen, you can also pass on assets worth up to £3,000 tax-free in any tax year, according to current rules.

36A03628011B4CF6AD39A7FA7E8325B6

Source: https://www.gov.uk/inheritance-tax/gifts

Weddings 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, whether in the form of investments or cash, will be exempt from inheritance tax. For grandchildren, this tax-free allowance is £2,500, and for anyone else it is £1,000.

The power of ISAs

While investment assets held within your Individual Savings Account, or ISA, cannot be passed on intact (in their ISA wrapper), remember that your gift could have a more powerful long-term effect if your loved one makes use of their own ISA allowances.

If you are passing on an investment to a child, Junior ISAs can be an especially valuable tool. 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.

While less than an adult’s annual ISA allowance, assets worth up to £4,368 can be squirreled away into every child’s Junior ISA each year, under current rules. Over time, you could therefore build up a pot of savings that could create transformative opportunities in their adulthood.

It is important to remember that ISA and Junior ISA tax rules may change in the future and their tax advantages depend on your individual circumstances.

We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

It is important to remember that the value of the income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.