Finding a suitable investment for a child’s inheritance can be a daunting task for parents. Firstly, there is often an emotional attachment to the money because of the way it was generated. Secondly, there is often a reluctance to take investment risk because any loss is considered to be a waste of the inheritance and disrespectful of the gift. This means that the investment has the potential to lose value in real terms over time.
Inheritances left by family members to children often have little structure about how and when a child should benefit from the money. This means that substantial funds can be bequeathed, without restriction, to children once they reach 18, whether or not they are in a suitable place to receive it and use it wisely.
To add to this, there are also tax considerations to take into account and a requirement to ensure that you, as a parent, do not get a tax bill as a result of the investments that are in place for your children.
Fortunately, there are various means to invest an inheritance to ensure that your children continue to benefit throughout their lives.
Savings Accounts: The simplest and most common solution is to place the money into a savings account, using the funds for education fees, house deposits, and even wedding expenses. This strategy may suit smaller sums of money, but issues start to arise for larger amounts. Any interest earned over £100 is assessable to the parent’s marginal rate of income tax.
Then there is the interest rate itself. A quick Google search will show that even the best interest rates can’t keep pace with inflation, eroding the purchasing power of the inheritance.
ISA and Junior ISA Investments: Most people will be familiar with ISAs; they allow investments to grow free of Income and Capital Gains Tax with annual contributions capped at £20,000. Stocks and Shares ISA’s can only be opened at the age of 18 but Junior ISA’s (or JISA’s) can be utilised from birth.
The annual allowance for JISA’s is set at £4,368 and means that you can regularly move the inheritance over to a tax-efficient environment and kick-start your children’s ISA assets. This also allows for the inheritance to gain exposure to equity markets and with a time horizon of up to 18 years, providing ample time for the effects of compound interest to work its magic.
However, there is an inherent disadvantage. Once your child reaches the age of 18, the account defaults to a regular ISA and as such you lose any and all control of the account. And, at that point, who knows where the money will go? Possibly not textbooks and stationery.
Trust Planning: Trust planning enables you to maintain control over your children’s inheritance regardless of age. Predicting whether a young child will be mature enough at 18 to use such a large sum of money wisely is impossible, and most parents would prefer to retain some control and flexibility over when their child gains access.
The use of a Discretionary Trust allows parents (as trustees) to dictate the underlying investments but, more importantly, when their children can withdraw the funds. An added benefit of a Trust is that the money sits outside of the parent’s estate and as such avoids any nasty inheritance tax charges.
The message to come out of all of this is that an inheritance can quickly become both an asset and a liability. It requires careful planning to make sure that it becomes a fitting legacy for the person that bequeathed it. At Foresight, our Wealth Strategists can consider all the options with you and make sure that an inheritance can be the springboard to a sound financial future.
Please contact us if you would like further details.