Top Ten Tips: Ways of ensuring your child’s financial future

Education trust

Money can be put into a trust to pay for a young person’s education. This could be an inheritance or funds from parents or grandparents and the money can be held safely and used to pay for their education. While Scottish students still get free tuition at Scottish universities, there are still rents, books and living expenses to account for. And if your child wants to return to university and do a post-graduate course or a second degree, then these are chargeable and can cost thousands of pounds.

Buying a property

Getting that first foot on the property ladder is becoming more and more difficult. The days of 100 per cent mortgages are history, and it would be very difficult for a young person to raise a deposit of up to 20 per cent of a property’s price, especially at a time when rents are quite high. Many will turn to the “bank of mum and dad” to get on the first rung. It might be you pay or lend a deposit amount to your child. Or you may decide to buy the property in both your names and have your child pay towards the mortgage. But beware of capital gains tax (CGT). If your child has a spare room, renting it to a friend will help with the mortgage costs and there are tax breaks on this.

Inheritance

With the inheritance tax (IHT) threshold set at £325,000, some families may choose to distribute inheritance early, so for instance allowing them a sum of money, shares or access to a family property. If transferring a property or shares, care must be given not to trigger a CGT liability on the gift and to avoid falling foul of various rules to avoid you gifting an asset then continuing to benefit from it. However, with proper advice this can help mitigate IHT.

Skip a generation

Grandparents could leave their inheritance directly to grandchildren and skip your generation should you be financially secure enough. If you have recently received an inheritance in the past two years and wish to pass some of this on to your children, a deed can be put in place to, in effect, vary the deceased person’s will leaving either all or some of your inheritance to your children directly thus avoiding it being a gift from you for IHT purposes.

Powers of Attorney

If a child relies on you for money it may be wise to put in place a power of attorney. This means that should something happen to you, or you are out the country for a time, they can still access funds, pay their bills or deal with matters such as phone contracts independently. You do not have to appoint the child themselves, simply someone you trust to look after your funds if you cannot.

Family business

If there is a family business, children could become shareholders and receive a dividend, affording them an income directly from the business. This means it is taxed as their own income, rather than parents being taxed.

Checking tax rates

If a student for instance has had a summer job, then it is important to check they have been paying the correct tax. They may have been overpaying and will be entitled to receive that money back.

Kickstarting a pension

Gifting to top up, or even start, a pension pot means leaving a legacy to children in later years. Many young people won’t be able to afford, or don’t feel quite ready, to pay into a pension pot so this is something you can do to support them.

Loans

You could lend money to your child, for a car or deposit for instance, at a more preferential rate than they would get from a financial institution. The benefits are two-fold: you could get a better rate of interest and your child will be getting the loan at a better rate.

Marriage gifts

If your child is getting married and would prefer cold hard cash to a new cutlery set, it is worth knowing that each parent can give up to £5,000 without it being brought back into the estate for inheritance tax purposes if the parent dies within seven years.