My parents (in their early 80s and in good health) are planning their finances to (hopefully) avoid paying inheritance tax when the time comes. They have asked me to come up with a plant to invest £30K for each of my 3 children (aged 14, 10 and 7) with a view to this being available to them when they are 25. Taking charge of this amount of money scares me - where do I start?
The first thing to do is to work out the mechanism involved in the transfer of this money.
- Are your parents thinking of giving you the money to invest on behalf of your children? If so - think this through.
Inheritance Tax - a Potentially Exempt Transfer
If your parents are giving it directly to you, this would be deemed a gift from your parents to you.
We call this a Potentially Exempt Transfer, which means that the Inheritance Tax due on this gift if it had remained a part of your parents' estate, may still be payable in whole or in part if they die within seven years of making the gift. So in practice, as long as one of your parents survived the seven years you'd be OK in terms of the Inheritance Tax, if it's a joint gift.
The money would then be in your possession. So presumably you would then open investment accounts for your children in your own name, invest as you see fit and then give the money to them when they turn 25.
This keeps the money in your control, which may be advantageous.
Income Tax & Capital Gains Tax
The money being in your control also means that you might pay income tax on it personally, either as it grows or as capital gains tax when you pass it to the kids. It might make your own Inheritance Tax position worse if your other assets are valuable enough.
Your parents should consider a trust, but would need to take legal and financial planning advice first. This would ring-fence the money and enable you as trustee to manage it for your children. The trust would need to be carefully drafted however, and the transfer of money into the trust would still be a gift.
The above concerns are far more important than how the money is actually invested.
How to invest the money
Given that the timescale for your eldest child is 11 years, then you should invest in assets like funds which will grow, rather than leave the money as cash in the bank where it'll lose money due to inflation.
Don't be tempted to DIY your way through a complex decision like this. Encourage your parents to seek independent financial advice, so that they can give the money away in the most tax-efficient manner possible.