AJ Bell press comment – 12 December 2022
- The value of a Lego Harry Potter Hogwarts Castle every Christmas could give your kid a pot worth £11,000 by their 18th birthday
- Gifting to grandkids is a great way to reduce inheritance tax bills
- Even setting up a £20 a month investment would give your child £6,400 by the time they turn 18
Laura Suter, head of personal finance at AJ Bell, comments:
“Lots of parents or grandparents will be stumped for things to buy the kids this Christmas – and may not want to add to the growing toy pile. A great alternative is to give them money, but instead of slipping a £10 note into their Christmas card you could give them a much longer-lasting gift that could result in a tidy sum of money once they reach 18.
“By investing cash for the children in your life you’ll avoid adding more toys to landfill and will give them a great pot of money to start their adult life. By ditching each year’s must-have toys in favour of a contribution to an investment account, you could have thousands of pounds stashed away for your child or grandchild.
“For example, this year’s spendy kids gift is the Lego Harry Potter Hogwarts Castle, coming in at a cool £410. However, if you invested that money each year, getting a return of 4% a year, you’d have built a pot worth almost £11,000 by their 18th birthday – assuming you started from birth. Even forgoing less expensive presents can really add up. For the price of an £80 Toniebox or Gabby’s Purrfect Dollhouse, both on the hot list of presents this year, every year means an investment pot worth £2,133 by the age of 18 – which is probably more attractive to an 18-year-old than a toy gathering dust.
“Meanwhile a £95 Hot Wheels Ultimate Garage will lead to a pot worth more than £2,500 by the age of 18 and forgoing the £150 Nerf Blaster Go Kart with Blaster and Dart each year will leave your child with a pot worth £4,000.
“If you feel like too much of a Scrooge ditching presents altogether, you could just cut back how much you gift and invest the difference. It’s also easier to ditch the presents when your kids are younger, as they don’t yet understand how many presents they should receive (and will probably be more interested in the wrapping paper). But even if you make a £100 contribution to your kid’s Junior ISA for their first five years, and then switch to getting them a present, they would have a pot worth £940 when they’re 18.
“Giving money can also be a great way to spread the cost of Christmas over the year. Rather than making a lump sum investment, parents or grandparents can set up monthly investing for the children in their life and contribute a small amount each month. If set up from birth, a £20 a month contribution could give them a pot worth £6,400 by the time they are 18.
“At the other end of the spectrum, the Junior ISA limit is a whopping £9,000, and any parent fortunate enough to be able to put that amount away for their child each Christmas would be handing them a £240,000 present on their 18th birthday. However, for many parents that will be a pipe dream and even squirreling away a little money each festive season will be enough to help your kid out when they’re 18.”
The tax benefit of gifting
Gifting money is a great way to move the assets out of your estate for inheritance tax purposes. Everyone can pass on an estate worth up to £325,000 free of inheritance tax, and some people are eligible for an additional £175,000 limit if they are passing on their main home. But after that the estate will have to pay 40% tax. If you know you’re going to hit this threshold and can afford to part with money now, moving money out of the estate while you’re alive can save tax in the future.
Anyone can gift up to £3,000 a year, as well as extra amounts when certain people in the family get married, without it being considered for inheritance tax purposes. Any gifts over that amount will be subject to the seven-year rule, which means that if you were to die inheritance tax is due on a sliding scale until seven years have passed.
3 funds to gift this Christmas
Fidelity Index World – A low-cost passive fund that tracks the global stock market and gives exposure to hundreds of companies around the world. A good option to ‘buy and forget’ and only costs 0.12% a year.
Personal Assets – A ‘safer’ option for those who want a lower-risk investment fund. This investment trust is positioned to fare tricky market conditions well, with exposure to inflation protecting assets, such as gold and inflation-linked bonds, as well as equities. The fund costs 0.67%.
Abrdn Global Smaller Companies – For those comfortable with more risk, this fund invests in smaller companies around the globe. This means it comes with a more volatile ride, but smaller companies have been proven to outperform over longer terms. Run by renowned investor Harry Nimmo and costing 0.95%, the £1.1bn fund has been running for a decade.
