We all want what’s best for our children, right? And when it comes to ensuring they reach their goals, most of us are willing to help out financially if we can, whether it’s by gifting them money or lending it to them.
So, if you're looking for ways to help boost your little one's financial future and give them a head start on achieving their aims (whether this is to buy a house, go travelling, or something else entirely), here are some things you could do.
Gift them money
One way to support your child financially is by simply giving them money (assuming that you can afford to do that, obviously!). And one situation where you may want to do this is when your child becomes a young adult and are planning to buy their first home.
Unfortunately, due to the average price of properties rising, they may not have enough money saved to pay for their full deposit and achieve their goal of getting on the property ladder. In this situation, depending on how much they need, you could choose to contribute to the deposit and provide them with the extra cash.
And you wouldn't be the only one to do this. In the UK, it's said that 84% of parents are happy to give their child a helping hand when it comes to buying a house, and 57% choose to gift them the money with no requirement to pay it back later1.
However, if you’re willing and able to gift money to them, it’s important to understand the potential tax implications. You or your child won't need to pay any immediate tax on this money, but down the road, inheritance tax could potentially make an appearance.
As things currently stands in the 2024/25 tax year, you’re allowed to give away up to £3,000 without having to worry about inheritance tax – this is your annual allowance, and you should be able to carry any unused allowance from the previous year over to the next tax year.
This means that if you haven’t gifted money to anyone in the previous tax year, you could give your child up to £6,000 in one year without inheritance tax being an issue.
Also, do keep in mind that the current inheritance tax threshold allows you to pass up to £325,000 to your loved ones without having to consider inheritance tax. And another thing to note is that gifts are free of inheritance tax if they were made at least seven years before you pass away2.
Lend them money
As a parent, you don’t necessarily need to gift money to your child to help them reach their goals. In fact, a good alternative could be to lend them money with the expectation that they'll pay you it back when they're ready.
Just like a bank would do, you could give them what they need with them committing to paying you back over a set period.
However, for this to work, the terms of this exchange will need to be agreed by both parties, including whether interest should be charged or not.
This way of helping could be a good compromise as they'll get to fund their projects and turn their dreams into reality, and you know that you’ll get your money back at some point – meaning it’s a win-win situation.
Teach them good saving habits
Gifting and lending money to your child who needs financial help is fine, but teaching them how to save for the future is even better!
And it’s never too early or late to teach them good saving habits and how helpful it could be to tuck money away for a rainy day.
If your child is very young, you could try and play some games with them that involve money (such as Monopoly, for example) to help they understand the value of it.
However, it’s also important to show them how money works in real life. For instance, when you go shopping, you could explain the whole process to them, from planning and budgeting, to actually making the purchase and tracking your spending. Similarly, make sure you mention your savings and explain them the ‘why’ and ‘how.’
When they’re a bit older, you could even give your child some pocket money and challenge them to save over a whole year. Or you could also ask them to theoretically budget for the next grocery shop – that way they get to understand the daily dilemmas adults have to deal with when it comes to money.
Opening a savings account for your little one could also help, especially if you involve them in every decision you make and show them the money building up over the years.
Consider investing in their future
If you want to give your child a head start in life, it could be worth investing in their future as this could give their savings an opportunity to grow further over the years (as any gains they make won't be tied to set interest rates).
If this appeals to you, then there are many ways to go about investing for your child. For example, as a parent or guardian, you could open a Junior Stocks and Shares ISA for your little one with a provider such as Wealthify who will do the hard work of choosing the investments for you.
With the latter option, your kid will be able to earn profits tax-free. But that’s not the only benefit.
If you invest in a Junior ISA, your child’s money will be locked away and nobody, not even you, will be able to dip into it at any time. This means that their money could have more potential to flourish as it will be invested for longer.
Then, once they turn 18, your child will gain full control over their savings pot and they’ll be able to choose what to do with the money.
The account will also automatically turn into an adult Stocks and Shares ISA, giving your kid the possibility to continue investing if they want to.
The maximum you can pay into your child’s ISA is £9,000 for the 2024/25 tax year (although this is subject to change in future) and you have until midnight on 5th April to use this allowance, otherwise it’ll be lost forever. Yep, that's right – you can't carry your unused allowance over to the next tax year.
Obviously, you may not be able to contribute as much, and that’s ok. However, you could still build a decent nest egg for your kid by investing small amounts regularly or paying the entire allowance in at the start of the tax year – the choice is completely up to you.
And if you start early, your child’s money could benefit from something we call ‘compounding.’
Put very simply, when you invest, you sometimes receive payments from companies held in your portfolio – these are known as 'dividends'. The magic happens when you reinvest these dividends.
Provided the environment is favourable, your child's profits could generate further profits when they're reinvested into their Plan, and over a number of years, their pot could grow exponentially bigger. And with time on their side, your child could take full advantage of the potential power of compounding. Let’s use an example to illustrate this, shall we?
Say you start investing in a Junior ISA on the day your child is born, and you decide to put £60 a month in their account (starting with an initial deposit of £60 when you open it).
Well, if markets perform as expected, they could celebrate their 18th birthday with £18,5353.
And if you want to open a Junior Stocks and Shares ISA for your child, then you may want to consider having a look at robo-investing platforms where you can get all the hard work of buying and selling investments done for you and your child.
At Wealthify, we’ve got a team of experts who’ll build your child’s ISA and manage it on an ongoing basis. All you need to do is choose how much to invest and the investment style you’re comfortable with, and we’ll do the rest.
References:
1: Mortgage Advice Bureau - Would you borrow from the Bank of Mum and Dad?
2: Government website - How Inheritance Tax works: thresholds, rules and allowances
3: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £14,188. If markets perform better, your return could be £24,492. Values correct as of 20/07/23.
Past performance is not a reliable indicator of future results
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. With a Junior ISA, your child could get back less than what was invested for them.
