The bank of mum and dad: what you can do to help your child financially

Want to give your child a head start in their adult life? Here’s what you could do.
Mum with children sat on a bench | Wealthify
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We all want what’s best for our children, and when it comes to ensuring they reach their goals, most of us are willing to help out financially, whether it’s gifting or lending money. If you’re looking for ways to boost your child’s financial future, here are some things you could do.

 

Gift them money
One way to support your child financially is to simply give them money, assuming you can afford it, obviously. Say, your child is a young adult who’s planning on buying a home. They may not have enough money saved to pay for their full deposit and achieve their goal. In this situation, and depending on how much they need, you could choose to contribute and provide them with the extra cash. In the UK, 84% of parents are happy to give their child a helping hand when it comes to buying a house, and amongst them, 57% choose to gift the money with no requirement to pay it back1.

If you’re willing and able to gift money to your child, it’s important to understand the potential tax implications. You or your child will not be paying any immediate tax on it, however, down the road, inheritance tax could potentially make an appearance. As things currently stand (January 2021), you’re allowed to give away up to £3,000 per tax year without worrying about inheritance tax – this is your annual allowance and you should be able to carry any unused allowance from the previous year. This means that if you haven’t gifted money to anyone in the one previous year, you could give your child up to £6,000 without inheritance tax being an issue. Also, remember that the current inheritance tax threshold allows you to pass up to £325,000 to your loved ones without having to consider inheritance tax. One thing to note too 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. A good alternative could be to lend them money. Just like a bank would do, you could give them what they need and they commit 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 can be a good compromise as they get to fund their projects and turn their dreams into reality, and you know you’ll get back your money at some point – 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. If your child is very young, you could try and play some games with them, so they understand the value of money. 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, from planning and budgeting, to 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 give your child some pocket money and challenge them to save over a whole year. Or you could also ask them to budget for the next grocery shop, that way they get to understand the daily dilemmas adults have to deal with. Opening a savings account for your kid could also help, especially if you involve them in every decision you make.

 

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. There are many ways to go about that. You could either buy investments on their behalf, or you could open a Junior Stocks and Shares ISA. With the latter option, your kid will be able to earn profit 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, meaning their money could have more potential to flourish. Once they turn 18, your child will gain full control over their 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 put in your child’s ISA is £9,000 per tax year and you have until midnight on 5th April to use it, otherwise it’ll be lost forever. Obviously, you may not be able to contribute as much, and that’s ok. You can still build a decent nest egg for your kid by investing small amounts regularly. And if you start early, your child’s money could benefit from something we call ‘compounding.’ Put very simply, when you invest, you can 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 profits could generate further profits and over a number of years, your pot could grow exponentially bigger. With time on their side, your child could take full advantage of the power of compounding. Let’s take an example to illustrate this. Say you start investing in a Junior ISA soon after your child is born, and you decide to put £60 a month in their account. They could potentially celebrate their 18th birthday with £17,9613.

If you want to open a Junior Stocks and Shares ISA for your child, consider having a look at robo-investing platforms where you can get all the hard work done for you. 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, we’ll do the rest.

 

References:

1: https://www.mortgageadvicebureau.com/expert-advice/first-time-buyer/the-bank-of-mum-and-dad-is-9th-biggest-lender

2: https://www.gov.uk/inheritance-tax/gifts

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 £13,984. If markets perform better, your return could be £22,871. Values correct as of 03/09/20.

 

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.

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