UK: Next In Line - Do You Have A Succession Strategy For Passing On Your Wealth?

Last Updated: 17 October 2013
Article by Smith & Williamson

A look at some of the options available for investing for and gifting to the younger generation.

Everyone has different financial objectives and risk tolerances. But a well-managed portfolio can be structured to meet your specific family requirements and include a mix of longer-term growth assets and shorter-term holdings for liquidity. This can help to fund education, for example, with the potential to provide a lump sum later on, perhaps towards a deposit for a first property.

What are the options?

Equities

Investments in equities can be part of a portfolio or through funds or collective investments giving access to a spread of UK and overseas investments. Payments into children's portfolios can be made on a monthly basis, which can help to smooth the highs and lows of stock markets by averaging the price paid over a period. Importantly, equities can provide some protection from inflation, although it must be accepted that the value of equity-based investments can go down as well as up.

ISAs

Grandparents and parents can fund Junior ISAs (£3,720 for this tax year). At 18, the child can access the Junior ISA or it can be converted into an adult ISA. Cash ISAs are also available for anyone over 16 – this year's allowance is £5,760.

National savings

Children's bonds are available from NS&I. Interest on this cash investment is tax-free and the current 35th issue guarantees a compound rate of return over five years. The bonds can be cashed early with a penalty equivalent to 90 days' interest, but they should be viewed as a five-year investment. The maximum investment is £3,000 per issue and parents, a guardian, grandparents or even great-grandparents can invest for anyone under 16. Bonds cannot be held beyond the child's 21st birthday.

Bare trusts and investment bonds

A child is entitled to the capital within a bare trust at 18. However, investment bonds can be placed in a bare trust with a range of maturity dates to make funds available at a later age. This type of investment bond has no value until maturity and cannot be encashed early. A portfolio can be designed to support the younger generation's needs while building in peace of mind for donors.

Offshore investment bonds

These can be held in a parent's name and used towards, say, school fees by using the annual tax-free withdrawal allowance of 5% of the initial investment. Once children are 18, bonds can be assigned to them and, providing they are non-taxpayers at the time, it's normally possible to surrender the bonds without any tax liability. The capital is invested in underlying investment funds selected by the investor.

What are the tax issues?

Gifts made to a child are potentially exempt from IHT, provided the donor survives seven years, otherwise the annual £3,000 IHT exemption for gifts and nil-rate band (currently £325,000) is brought into the equation. If required, insurance can be taken out to protect the gift in the event the donor was to die during the seven-year period. Depending on what is given, there might be CGT implications on the disposal to consider.

Capital gifts from a grandparent, aunt or uncle are more tax efficient than parental gifts. Where the income from gifts originating from a parent exceeds £100, the whole of the income is taxed back on that parent. In contrast, gifts from grandparents can be invested in the child's own name or within a bare trust so that any income is taxed on the child and gains are subject to the child's own individual CGT allowance (£10,900 in the current tax year). Similarly, a child has a personal income tax allowance (currently £9,440), which means that tax is only paid if substantial capital gifts are involved.

Top tips

  • Agree your investment objectives and a timeline
  • Consider how much risk and control over investments is appropriate
  • Decide who will provide the funds: parents, grandparents or others?
  • Consider a diverse set of investments
  • Review performance regularly against objectives
  • Factor in sufficient liquidity – i.e. can your investments be easily accessed and converted into cash if necessary?

The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.

Smith & Williamson Financial Services Limited Authorised and regulated in the UK by the Financial Conduct Authority and regulated by the Central Bank of Ireland for conduct of business rules. Smith & Williamson LLP Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International. Smith & Williamson Investment Management LLP Authorised and regulated in the UK by the Financial Conduct Authority and regulated by the Central Bank of Ireland for conduct of business rules.

The Financial Conduct Authority does not regulate all of the products and services referred to in this newsletter.

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