Children can benefit from tax-free gift but watch out for ‘penalty’

“A child receiving just £50 a month in an investment JISA that earned five percent per year over 18 years would have a pot at the end worth £17,333, from a total contribution of £10,800 – an investment gain of £6,533 without factoring in any charges.”

For adult children, gift-givers can opt for an ISA or Lifetime ISA instead. Just like JISAs, Adult ISAs can be invested either in stocks and shares or cash, with any gains or income free from capital gains tax and income tax – and there are no restrictions on when they can be accessed.

Ms Haine said: “For a house deposit, contributing towards a Lifetime ISA is more beneficial, as savers aged between 18 and 39 can contribute up to £4,000 a year into an investment or cash LISA, and the Government will top it up by 25 percent. That’s up to £1,000 of ‘free cash’ a year.”

However, she continued: “There is one condition. The pot must go towards either the purchase of your first property (capped at £450,000 in value) or be held until you are at least 60. Withdrawals before 60, other than for a first property purchase, will be subject to a 25 percent penalty as the state top-ups are clawed back.

“LISAs are great for long-term saving for those between the ages of 18 and 39, however, they can continue to pay in and still receive the state top-up until they are 50.”

The gift-giver is able to contribute up to £20,000 per tax year, although Ms Haine warns to keep note of the risks around IHT, as certain sums may end up costing more depending on how soon the giver dies.

According to Ms Haine, the inheritance tax rules to keep an eye on include:

  • Up to £3,000 can be given away every year tax-free. This allowance can be carried forward for one tax year, which means up to £6,000 can potentially be gifted in a lump sum free from future IHT liabilities.
  • The small gift allowance means multiple cash sums of up to £250 per recipient can be given without affecting an IHT liability.
  • People can also give money away that comes out of their regular income – but it must be proven that the regular payment does not affect the giver’s standard of living.

An alternative option to opening up an ISA could be to go down the more traditional route of gifting premium bonds instead.

NS&I Premium Bonds

National Savings & Investments (NS&I) Premium bonds have been around for almost 70 years with many considering them the safest way to save money because they are 100 percent backed by HM Treasury.

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