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  1. Wealth
September 19, 2016

How best to financially future-proof your children

By Spear's

Rosalind Hetherington opens the pencil case of financial stationary on offer to parents hoping to best prepare their children for the road ahead.

Tis the season to buy stationery. Or so go the adverts that have been running of late reminding one and all that it is time for young children to go back to school and older children to go back to university.

I recall some years ago returning to university after the Christmas holidays. I, along with many of my fellow students, drove back up to Scotland with snow on the ground and with the possibility of more to fall. As such the drive could have proven treacherous. Before departing, my parents, like many others, decided to give me some supplies in the event that I became stranded on the drive back up. Their choice? Some water and a big bag of chocolate.

Perfectly reasonable preparation given that I had bags of clothes in the back of my car should I need them for warmth and the journey involved driving along well-trodden (and, critically, well gritted) motorways and A-roads. However, on discussing these preparations with friends we found that some parents had gone a little further. Memorably, one friend’s parents equipped him with what almost amounted to a full mountain survival kit, including sleeping bag, days of food supplies and a shovel. The general view was that this was overkill given that the most likely place to get stuck in the snow was when attempting to drive up Dublin Street in the middle of Edinburgh on arrival.

However, the varied responses to a blizzard does highlight the different ways in which parents like to prepare their offspring for any eventuality. So, it seems timely to look beyond the basics and consider other ways which you can provide a broad safety net for your children and grandchildren.

The most well known and obvious are the wide range of savings and investment products available on the commercial market for parentsto save money on their children’s behalf. For example, a junior ISA could be used to save and grow money for their future without paying income or capital gains tax.

However, this comes with a warning label: Parents should think carefully before setting up trusts for their minor children. If they do, funds going in, over the nil rate of £325,000, are charged to inheritance tax at half the current rate of inheritance tax on death – currently 20 per cent. There is also a charge to take funds out of the trust and on every ten year anniversary of the trust.

Furthermore, the income and gains are taxed at the higher rates for trustees or at the parent’s rate – which may be higher than the children’s personal rate. Perhaps a word in granny’s ear might be an option, as the attribution of income received by a minor child does not apply to settlements set up by grandparents.

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For adult children, a sensible option might be to make gifts to them. The money could be used, for example, for them to buy a flat so that they are on the property ladder (without the additional 3 per cent SDLT if the parents who already owned a property bought it for them); to fund further education to improve their employment prospects or to be used to set up their own business should they show entrepreneurial flair. If you make a gift of cash there is no income tax or capital gains tax to pay. The added advantage of gifting sums to your adult children is that the funds you have given are (provided you survive for seven years following the gift) out of your estate for inheritance tax purposes.

Here, though, there is also a warning label:  Be wary of retaining any interest in the gift you give your child if it is not in the form of cash. For example, if you gave a child a flat in London that you previously owned and then continue to stay there when visiting the city, it can be deemed for inheritance tax purposes and so will be taxed as part of your estate on death even if the gift was more than seven years prior to your death.

However, aside from passing wealth down the generations, there are other, arguably more important steps that HNW parents can take to prepare their offspring for the world. The children of HNW individuals might, at some point, be destined to inherit a large amount of assets after the HNW parent is no longer there to guide them in managing their inheritance. It is a good idea therefore to teach them the principle of prudent wealth management early. If the family has a team of professionals who deal with the investments and assets of the estate, then introduce the children to these professionals so they can begin to establish a relationship and an understanding of what the individuals do.

So more than just preparing for the ‘off’, whether it be to primary school, or for tertiary education, it is important to prepare your children and grandchildren for the future both financially and mentally. Sometimes that will involve passing on wealth and responsibilities during your lifetime, sometimes it may simply involve a packet of Mini Eggs. Whatever preparations you choose to make will put both your mind, and your children’s minds, at rest for the future.

Rosalind Hetherington is a trainee solicitor at Maurice Turnor Gardner 

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