Lianne Lodge is a solicitor at Pagan Osborne. She outlines ten ways parents can provide for their children.
• Gifts- Because assets can be liable for Inheritance Tax on death, many parents make gifts to their children when alive. If you live for seven years after the gift is made, it is unlikely to be counted as part of your estate for Inheritance Tax. It is important to take advice as, depending on the circumstances, a gift may trigger a Capital Gains Tax Liability or, if the parent derives a benefit from the asset, for example still living in the house which has been gifted, it will still form part or their estate for Inheritance Tax.
• Investing in property- With interest rates low, many have taken the opportunity to invest in properties for their children. Some will buy them outright as a gift, others as an investment and some splitting the difference, for example providing cash for the deposit on the understanding that if the property is sold the parents either get a share of the gain or get their loan repaid with interest.
• Minute of agreement – It is important to put in place a minute of agreement for any loan confirming how and when it will be repaid. This ensures there is an understanding of the terms, protecting both parents and children and potentially saving heartache later.
• Lifetime trusts – If parents can afford to do so, they could set up a trust for their children during their lifetime. A common reason is to pay school fees. While there can be certain tax advantages in relation to Inheritance Tax, parents should take advice as it may result in higher income tax payments.
• Investment- Investing into a pension pot for them gives the security of knowing children will be provided for later in life as well, it also removes cash from the estate for Inheritance Tax purposes, provided they live for seven years after it is set up, without taking the risk of gifting the cash to the child outright. Children born after September 2002 will have the Child Trust Funds and many parents will choose to top up the Government’s initial investment of £250. Parents, or other family or friends, can top it up by a maximum of £1200 per year and there is no tax payable on the income or gains in the account. The account is held until the child reaches 18 and there is an additional £250 added from the government when the child reaches the age of seven.
• Power of Attorney –By putting in place a Power of Attorney, parents can ensure their assets will not be frozen if they are involved in an accident and can no longer look after their own affairs. For example, if a couple is in a car crash, the attorney can ensure that the mortgage will be paid and can have access to the bank accounts to pay for the children’s outgoings. The nominated person would take control of assets and ensure children are provided for as you would wish.
• Pension/Death in Service Nomination - Many would benefit from a lump sum payable from employers or pension providers if they were to die before retirement. If this applies to you, please complete a form of nomination confirming who should benefit. It is a simple exercise which means the lump sum will go directly to your beneficiaries and may not be counted as forming part of your estate for Inheritance Tax purposes.
• Trusts in your Will – It is vitally important to have a Will, without one winding up an estate can be costly and a drawn-out process. There are provisions you can make in the Will to ensure children are provided for as you would like them to be. In Scotland children are entitled to inheritance at 16 which seems very young. I would suggest including provisions in a Will to delay this to 18, 21 or even 25. There can be discretion to ensure money can be used before they reach that age, for example to purchase a flat or pay university fees. When there are step families involved, it can be difficult to balance providing for your spouse and protecting inheritance for children. This can be easily resolved by setting up a trust in your Will. There are various options, for example the family home could be held in trust allowing the spouse to live there for as long as required, but the capital would pass to children.
• Guardianships - If your children are under 16, it is important to specify in your Will who you would like to appoint as their guardian. This effectively passes on your parental rights and can save the family from a very difficult decision.
• Letter of wishes- If you do have young children, you may wish to draft a private letter to be stored with the Will. This letter of wishes would not be legally binding, but would give the executors and guardians guidance on how you would like your children to be raised.