With the increase in the cost of just about everything, several Thornton clients have asked me about this in the last year.
For many, the increase in mortgage costs tops this list.
Gifting money to the children outright
Gifts to help satisfy an immediate need, such as reducing their mortgage, providing a house deposit or fixing a broken boiler, are generally straightforward.
The primary decision is the number to write on the cheque!
As long as you’re Isle of Man domiciled, usually, there aren’t any tax considerations. If you’re unsure about your domicile position, 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 considering being “fair” rather than “equal”. Other siblings may have had different support in the past and may need some in the future, for example.
Wanting to invest in the children’s future
Rather than providing immediate financial support, parents may be looking to invest in their children’s long-term future. The discussion often concerns whether this is best done as an investment or 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, we believe it is best set aside in a bank or National Savings account.
Keeping short-term money in cash is sensible in case there’s a stock market fall at the time when the money is needed.
If it’s for a longer time horizon, investing can be considered, 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 money, ensuring that it is not frittered away. Any income tax arising (from interest and dividends) will be assessable to you.
If set up in the child’s name, any ongoing income tax would be assessable to them. The investment 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 and paying off their mortgage etc.
This can sometimes make both parties feel more comfortable, with the grandchildren’s future being 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 comforts them 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.
