Perhaps it’s the pandemic or maybe just a coincidence, but I’ve been asked about providing a financial helping hand to loved ones by several Thornton clients recently.
If this topic is something you’re considering doing, this article covers some options available to you and key points to consider.
Gifting money to the children outright
Making outright cash gifts to help satisfy an immediate need, such as a house deposit or broken boiler, are generally relatively straightforward. The major decision is the amount to write on the cheque!
As long as you’re Isle of Man domiciled, usually there aren’t any tax considerations. If you’re not sure about your domicile, it’s best to get professional advice.
Sometimes, parents may be concerned about making things equal across all siblings, mainly where one child needs help. The dynamics of all families are different and sometimes complicated.
Perhaps it’s worth thinking in terms of being “fair” rather than financially “equal”. Other siblings may have had different support in the past and may need some in the future, for example.
Wanting to invest for the children’s future
Rather than providing immediate financial support, parents may be looking to invest for their children’s long-term future somehow. The discussion often centres around whether this is best done as an investment or as a pension. Like everything, there are pros and cons.
Investment
The time horizon here is important. If the money is likely to be needed within the next five years, our view is that it is best set aside in a bank or National Savings account.
Keeping short-term money in cash is in case there’s a stock market fall at the time when the money is needed, such as that seen in the first quarter of 2020.
If it’s for a longer time horizon, we can discuss potentially investing, but whose name should it go in – yours or the children’s?
Setting it up in your name will allow you to keep more control of the investment, ensuring that it is invested for the long term and not frittered away. Any income tax arising (from interest and dividends) will be assessable on you.
If set up in the child’s name, any ongoing income tax would be assessable on them. It would also be taken into account on bankruptcy and divorce if held in their name.
Grandchildren
I’ve seen a few situations where financially comfortable parents have spoken to their children about their intentions. The children have said that helping with the grandchildren’s future would take some pressure off them.
The financial pressure on people in their 30s and 40s can be significant. They have people like me telling them they should save for their pension and have a cash emergency fund for a rainy day.
If they know that their parents have some support for the grandchildren covered, they can concentrate on their pensions, paying off their mortgage and the time they have bringing up the children.
This can sometimes also make both parties feel more comfortable, making the grandchildren’s future the focal point of any financial support.
Pension
The advantage of helping by using a pension is that they cannot access the money until at least age 50, and it’s tax efficient.
The pension would be in the children’s name. This gives some comfort that they will have something on top of the basic state pension when it eventually kicks in.
They would receive tax relief on the contributions made to it, reducing their tax bill by up to 20% of the contributions made.
I’ve seen it work well where a parent incentivises the children to save into their pension by matching their contributions for some time.
Family trust
Using a trust can also be a way of providing for your family’s future. There are advantages to doing so in some circumstances, but they can be complicated and expensive to operate.
Before I talk about this option with people, I’ll almost certainly have had a conversation to see if their objectives can be met using a combination of the above options. More often than not, they can be.
If you would like any help or a second opinion, please feel free to get in touch.
