32 finance What about the kids?


The tax year 2014/2015 has ended and the dust has settled from the frenzy of publications about tax-year-end planning. So no doubt you’re all set to welcome the new tax year feeling smug that you’ve maximised your allowances and minimised your tax liabilities, writes Matthew Harrison, partner at Wilkins Kennedy


You’ve maxed out on the £40,000 pension contribution; you’ve utilised the £11,000 capital gains annual exemption; transferred £15,000 into a New Individual Savings Account (NISA) and made use of the other tax-efficient investments. Some of you may have gone further and made arrangements to maximise your spouse’s allowances, but have we forgotten something?


Historically, the Government hasn’t made things easy for parents to look after their children


I found myself pondering the same question while I looked across the table at my children. What neither of them knew was that the eldest will be treated to a new car on her 18th birthday in a couple weeks time. What on earth was I thinking, making an impulse purchase like that? After all I am a tax adviser and I do have a “sensible“ reputation to protect.


Historically, the Government hasn’t made things easy for parents to look after their children, having introduced a number of anti-avoidance rules. For example, any income exceeding £100 arising from funds provided to the child by the parent is taxable on the parent. However, there are still means and ways to look after our kids in a tax-efficient manner and without the tax sting.


Pension contributions


Regardless of whether your children work, you can make pension contributions on their behalf into a stakeholder pension of £2,880 net each year. The pension provider will reclaim 20% tax relief from HMRC, increasing the total contribution to £3,600 gross. The growth is tax-free and can become valuable by the time your child retires.


New Individual Savings Account


From July 1, 2014 the New Individual Savings Account (NISA) allowance rose


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to £15,000. From April 6, 2015, it has increased again to £15,240 and can be utilised as all cash, all stocks and shares or alternatively, can be split between the two.


Income earned through NISAs is tax-free and there’s no capital gains tax to pay when you sell shares or units held in a NISA. The stocks and shares NISAs are available to UK resident individuals who are aged 18 or over.


Perhaps rather than that car I bought which decreases in value the moment my daughter drives off the forecourt, she could instead use the money for a NISA and watch her money grow in a tax-free environment? Children aged 16 or over are eligible for cash NISAs, although the anti-avoidance rules apply if the overall income generated by the parent’s gifts exceeds £100, making the tax-free income taxable until the child reaches 18.


Junior Individual Savings Account


Parents can also utilise Junior ISAs which have replaced Child Trust Funds. Consider using them as a long-term savings option for the children’s future and a very tax-efficient way of making gifts to them. In the tax year 2015/16 the Junior ISA allowance is £4,080.


Junior ISAs are available for any eligible children under the age of 16 but the good news is that the income remains tax free even if it is being generated from funds invested by the parent.


Assets for capital growth


Your children will be entitled to the capital gains annual exemption so that when they dispose of assets, only the profit is taxable (the ’gain’). The capital gains annual exemption for 2015/16 is £11,100 and this is an effective way to maximise their capital gains allowance. The key here is to consider assets that are geared for capital growth rather than income generation. Please note that care needs to be taken to avoid unforeseen capital taxes, if transferring valuable non-cash assets to minor children. Protective trusts should also be considered.


Perhaps it is too late for my daughter but I know what I’ll be doing for my second child.


Note: The contents of this article were correct at the time of writing on March 6, 2015.


What’s in it for the parents?


No doubt I’ll be the best father ever (for the week if I’m lucky) when my daughter drives away her car, but this will be the start of my sleepless nights while she’s on the road. Whereas with the sensible approach perhaps we can all instil a sense of responsibility in our children and at least we know the pension fund cannot be accessed until they’ve matured.


However, the reality is that we do benefit, as well, in the form of Inheritance Tax (IHT) saving; by careful planning, you can utilise your IHT allowances and allow the funds to grow outside of your estate.


Details:


Matthew Harrison 023-8024-7070 023-8024-7071 matthew.harrison@wilkinskennedy.com www.wilkinskennedy.com


THE BUSINESS MAGAZINE – THAMES VALLEY – APRIL 2015


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