Wealth structuring is certainly not the preserve of the ultra-wealthy, and there are a number of strategies families should consider to ensure that their wealth has maximum benefit for generations to come.
Being a parent is likely to have a significant impact on what you want to achieve financially. Read our guide to investing for your children’s future.
Establishing a Family Investment Company is a lesser-known, but clever strategy for investing for the younger members of the family while also securing several tax efficiencies across the generations – they can be particularly useful in mitigating against Inheritance Tax.
This option means that families can transfer significant sums of money into a UK-resident private limited company, with the funds then invested for capital growth, income or a mixture of the two, with any gains only charged at the 20% corporation tax rate, effective from April 2015. (Note, however that they will be subject to Income Tax at the recipient’s relevant rate.)
Importantly, with a FIC, each family member can be allocated a different type of share class to ensure that their portion of the family wealth is distributed in the way most appropriate to their personal circumstances. This means that a child could receive a yearly income which can be used for school or university fees before transferring to a different share class when they are older. There may also be very tax-efficient ways to transfer shares between family members to mitigate IHT, such as through gifting under the seven-year rule (the gift is known as a potentially exempt transfer).
The “articles of association” of an FIC can accommodate a wide range of considerations which will help the vehicle run smoothly and ensure that family wealth is protected and distributed in line with the wishes of the contributors of the wealth.
Starting a pension for a child may seem like taking forward planning to its furthest extreme, yet families are increasingly taking an interest in Junior SIPPs as a way to secure their child’s financial security. At present around 60,000 children in the UK have had pensions set up for them and take-up continues to grow.
There are a range of benefits to be had from this option, not least the peace of mind that comes from knowing your child will have a healthy private pension pot when they reach the “traditional” retirement age. The state pension age continues to rise in line with an ageing population and it is likely that today’s teenagers will have to work at least until they are seventy (by 2028 the official retirement age will have been raised to 67).
It may not be that well known, but any individual can contribute £3,600 a year to a pension, regardless of whether they have an income, and still receive generous tax reliefs. This means that parents (or indeed grandparents) can contribute £2,880 into a Junior SIPP and have this topped up by the 20% relief to the full annual amount, in effect.
The second big advantage to Child Pensions is that time really works for you. It was for good reason that Einstein called compounding “the eighth wonder of the world”. If you contribute the maximum amount to a pension every year from birth and have that money invested by a professional so it achieves a return of 6% a year the pot will have grown to over £500,000 by the time your child hits 40 (although, of course, they will not be able to access the funds until they are 55).
There are many ways that you can save and invest for your child’s financial future so that you are utilising all available tax reliefs and making your money work as hard as it can. It is well worth having a discussion with a wealth manager on these kinds of wealth planning issues as early as possible and consider the possibility of bringing the family’s wealth as a whole into the conversation.
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This post is a continuation from the Guide to Investing for Your Children’s Future Part 1.