Gifting money at Christmas might seem uninspiring, but the right financial gift for your kids can pay dividends over the long run due to the combined effect of tax benefits and compound interest.
Alice Haine, personal finance analyst at Bestinvest, said: “While the finances of parents and grandparents are likely to have been stretched over the past few years thanks to the damaging effects of the cost-of-living and cost-of-borrowing crises, there are glimmers of hope ahead that might free up cash. Interest rates are easing, and inflation is now in safer territory, in turn delivering a welcome boost to disposable income levels.
“Plus, with proposed changes to inheritance tax rules set to bring unspent pensions under the scope of IHT from April 2027 – and reductions in agricultural property relief and business property relief taking effect from April 2026 – now might be the right time for relations to pass on wealth to prevent families being drawn into the scope of IHT in the future.”
Savings accounts
Setting up a child’s savings account – one that encourages them to save and benefit from the compounding effect of interest payments – can help them understand the value of saving.
Some children’s accounts offer better deals than adult accounts, and while rates may not be as great as they were a year ago, there are still some competitive deals around.
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But Haines advises parents to track how much they contribute to a child’s savings account to avoid triggering an unnecessary tax bill.
“If the child receives more than £100 in interest from money given to them by the parent, then the parent is liable for tax on the interest if it is above their own personal savings allowance (PSA),” she explained.
“The £100 limit does not apply to gifts given by grandparents or other relatives, and if a parent has not used up their own PSA (£1,000 a year for basic-rate taxpayers and £500 a year for higher-rate payers), this can be set against the £100. Just remember; additional-rate payers have no concession at all,” she added.
Junior ISAs
A Junior ISA is a tax-efficient way to invest for a child or a grandchild’s future because all income and capital gains are free from tax, and once the money is stored in an ISA, it remains protected year after year.
The child can access the money when they turn 18 and either choose to withdraw it, leave it invested or top it up using their higher ISA allowance of £20,000.
Start a pension for your child
A child might not appreciate a pension as a Christmas present right now – but they will in later life.
Non-taxpayers, including children, have an annual gross pension allowance of £3,600, with contributions still attracting 20% tax relief. This means a relative can invest up to £2,880 into a child’s self-invested personal pension (SIPP), which is then topped up by the Government with £720 in tax relief.
As with all pensions, returns accumulate free from tax – but, of course, the recipient would not be able to readily access the pot. Currently, the minimum age is 55, but this is set to rise to 57 in April 2028.
Set up a trust
A trust can be a tax-efficient legal arrangement that allows assets of unlimited value to be held by a parent or grandparent as the trustee for the benefit of a child. The simplest type of trust is a bare trust, which allows the trustee to retain control of the assets, and there can be tax benefits as well.
However, trusts can be complicated, so those considering a trust with larger amounts of cash or multiple beneficiaries would be wise to consult a financial planner to ensure this is the most tax-efficient strategy for their gift.
LISAs
For children aged 18 and over, a Lifetime ISA (LISA) can help them save for a house deposit or retirement. Savers aged between 18 and 39 can contribute up to £4,000 per year into a LISA, and the Government will top it up by 25%.
After age 39, an existing LISA account holder can continue to pay in and still receive the state top-up until they are 50. The maximum Government bonus for someone who opened an account at 18 and maxed it out until they hit 50 is £32,000.
Like other ISAs, any income or capital growth within the LISA is shielded from income tax, capital gains tax (CGT) and dividend tax.
Premium Bonds
Many families consider Premium Bonds from National Savings & Investments (NS&I) a safe place to store children’s savings because they are 100% backed by the Government.
There’s no interest on Premium Bonds – but each bond is entered into a monthly prize draw with a top prize of £1m.
Parents and relatives can buy up to £50,000 in Premium Bonds for a child aged under 16, with all the prizes totally tax-free. However, unless someone wins big, they will likely lose value in terms of purchasing power once you factor in inflation.
