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Murray Beith Murray is a leading Scottish private client law firm.

For over 170 years we have specialised in meeting the legal, financial and administrative needs of individuals and families, family trusts, charities and private companies.

Call us today on 0131 225 1200
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6 minutes reading time (1251 words)

All I want for Christmas is my two front teeth, a Junior ISA and to reduce mummy’s and daddy’s Inheritance Tax liability

 It is that time of year again where children across the world will be on their best behaviour in the hope that Santa will bring them everything on their Santa wish list come 25 December.

But whilst most children will be asking Santa for the latest gaming console or for Buster the star of the John Lewis Christmas advert, they should be asking their parents or grandparents to invest the cash equivalent for them, which could see them set up for the future and not just for Christmas.

Not only could this result in them being a millionaire- yes you read that correctly- by the time they reach retirement age, it could also result in significant Inheritance Tax savings for their parents and grandparents.

So what is on Murray Beith Murray’s Santa list this year?

Junior ISAs (or JISAs)

These are tax free savings or investment accounts, for children under the age of 18, which work in a very similar way to their adult equivalent.

You can have a Junior Cash ISA, a Junior Stocks and Shares ISA or both and the maximum amount you can pay into a Junior ISA is £4,080, in the current tax year 2016/17.

Any money you pay into a JISA will be safely locked away until your child turns 18, at which time they will become absolutely entitled to the funds and it will be converted to a standard ISA. Your child at that time may wish to keep the funds in the ISA wrapper or they could use the funds to assist with their university fees, or further education or training costs, or to help them get an early foothold on the property ladder.

If your child is 16 or 17 years old, they can also contribute to an adult Cash ISA, in addition to their Junior ISA, up to the £15,240 limit in the 2016/17 tax year.

So how much could your child’s Junior ISA be worth?

If you contribute the current maximum amount of £4,080 each year (or £340 per month) to your child’s Junior Stocks and Shares ISA from birth until they are 18, their pot at 18 could be worth as much as £147,591.67 (presuming growth of 7%). By gifting £4,080 each year for 18 years, you could also potentially save yourself £29,376 in Inheritance Tax.

With that said contributing £340 a month may not be within every parent’s’ budget but if you contribute just £50 per month or £600 per year to your child’s Junior Stocks and Shares ISA from birth until they are 18, their pot could be worth £21,045.91 (presuming growth of 7%). Whilst this is inevitably less than the figure you might receive if you meet the full subscription annually, this represents growth of approximately £10,250 on your contribution and this sum might prove to be a very helpful deposit for a child trying to buy their first flat.

Monthly Payment

Potential Value of your child’s JISA at 18

Potential IHT Saving

£340

£147,591.67

£29,376

£50

£21, 045.91

£4,320

Pensions

You can start a pension pot for your child from birth and pay up to a maximum of £2,880 (under current rules) into their plan each year. What’s better is that you, under the current law, automatically get tax relief at 20% on pension contributions. Accordingly, if you make a contribution of £2,880, the Government will then add £720 in tax relief, increasing your contribution to £3,600.

Such gifts would be covered by your annual inheritance tax exempt allowance of £3,000, immediately removing that sum from your estate for inheritance tax purposes.

If you were to make contributions of £2,880 for 18 years, this would represent a total contribution of £51,840 and a possible £20,736 inheritance tax saving for your own estate. If the tax treatment remains unchanged, these pension contributions would be grossed up by the Government to £64,800. Assuming an annualised net return of 5%, your child’s pension pot could be worth more than £100,000 by the time they turn 18. Even if you stop making contributions at that point, if that 5% net rate of return remains constant until your child is 65, their pension pot could be worth in excess of £1 million by that time.

Monthly Contribution

£240

Total Contribution over 18 Years

£51,840

Potential Value of Child’s Pension at 65

£1,000,000

Your Inheritance Tax saving

£20,736

Contributing £2,880 per year may, however, seem out of reach for many parents but you would be surprised at how effective gifting £50 per month for 18 years could be to building up a pretty sizeable pension pot. However, the earlier you begin contributing the better, as the longer the funds have to grow.

The only downside is that your child will not receive the money until they are at least 55 but this provides them with a head start in planning for their retirement and the investments have plenty of time to grow, all free from income and capital gains tax.

Deeds of Variation or Disclaimer

If you are due to receive an inheritance that you don’t require because you may for example have Inheritance Tax concerns, you can vary or re-direct your interest to say a child, by entering into a Deed of Variation or Disclaimer, provided you do so within two years of the death of the deceased. This enables you to pass the wealth onto the next generation without the assets forming part of your estate for Inheritance Tax purposes.

If you do not want to pass the wealth onto your child directly, perhaps if your child is young, you could also pass it on to a Trust for your child(ren).

Lifetime Gifting

Christmas is a time for giving and you are entitled to make the following gifts free of Inheritance Tax:

  • Annual exemption of £3,000 every year.
  • Small Gifts of up to £250, which can be made to any number of individuals each year. For this exemption to apply the gifts made to any single person in the tax year must not exceed £250, that is, the £250 cannot be used to relieve the first £250 of a larger gift or to augment the annual exemption.
  • Normal Expenditure Out of Income- Gifts are exempt from Inheritance Tax provided that after allowing for all transfers of value forming part of your normal expenditure, you are left with sufficient income to maintain your usual standard of living. This is best proved by showing that a habitual pattern of giving has been established, for example, by you setting up payments at, say, Christmas and birthdays to your children of such amounts as would not lessen your normal standard of living. A solicitor could draw up a Deed of Commitment on your behalf recording and demonstrating your intention to make normal expenditure out of income gifts.
  • Gifts on the occasion of a child's marriage - £5,000 exemption (or £2,500 where it is a grandchild’s marriage).

You can also gift in excess of these allowances and provided you survive for seven years from the date of the gift and you have made no reservation of benefit, the gift will be exempt from Inheritance Tax.

By taking advantage of available Inheritance Tax exemptions to make gifts to your children or grandchildren each Christmas- or during your lifetime- you can help to set them up for life and ensure that more of your wealth passes to the next generation and not to the tax man.

Let’s hope we are all on Santa’s Nice List this Christmas.

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