• If you’re struggling to get your hands on the latest PS5 in time for Christmas, pause to consider that the cost of an original Playstation would now be worth £9,876 if invested in the Scottish Mortgage Investment Trust
• Tax implications of gifting and the benefits of Junior ISAs.
• What about Premium Bonds?
• 3 funds to gift this Christmas
Laith Khalaf, Financial Analyst, AJ Bell:
‘An investment definitely isn’t going to be as much fun as a PS5, but it will still be generating returns when the latest must-have games console is gathering dust in an attic somewhere. Gifting an investment is a pretty good way to give kids a financial head start in life, as well as introducing them to the idea of saving from an early age.
Premium Bonds have long been a favourite gift idea for parents and grandparents, but NS&I have dramatically cut rates this winter, and the prize pool now yields just 1% on average. A stock market investment looks much more attractive, as youngsters have time to ride out the ups and downs in search of higher long term returns.
There are a few things to be aware of if you’re gifting an investment, most importantly to protect your money from capital gains or inheritance tax. It also makes sense to wrap any investment gifts up in a Junior ISA. While your child or grandchild may not be a taxpayer right now, they likely will be in the future and the ISA wrapper can offer valuable protection from the taxman.’
What they would be worth now
As parents across the UK face a supply shortage of PS5 consoles (RRP: £450), the table below shows what would have happened if instead of buying each of the previous generation of Playstations each December, you had invested the money instead.
The Scottish Mortgage Investment Trust has been an outstanding performer, and the £299 cost of the original Playstation One would now be worth £9,876 if invested in this trust since 1995 instead. Even a plain vanilla FTSE 100 tracker would have more than trebled your money over the last 25 years. Gamers would have had to forego the delights of Grand Theft Auto and Micro Machines however.
It’s been a tough year, and no-one can begrudge some indulgence this Christmas. The numbers below are an illustration of how a financial gift for a child can really rack up in value over time, and that’s particularly the case if it’s topped up every now and then at Christmas or on birthdays. You can contribute to a Junior ISA or investment account using cash, or by using existing shareholdings that you wish to gift. There’s a £9,000 Junior ISA annual limit, and your child can happily hold a Junior ISA at the same time as a Playstation without breaching any tax rules.
|
Invested in |
||||
|
UK launch price |
Scottish Mortgage |
Personal Assets Trust |
HSBC FTSE 100 tracker |
|
|
PS 1 1995 |
£299 |
£9,876 |
£1,799 |
£1,058 |
|
PS 2 2000 |
£300 |
£5,308 |
£897 |
£575 |
|
PS 3 2007 |
£425 |
£4,342 |
£935 |
£684 |
|
PS 4 2013 |
£350 |
£2,020 |
£543 |
£444 |
Source: FE total return from 1st December 1995, 2000, 2007, 2013 to 4th December 2020
Capital Gains Tax and Gifting
If you’re gifting an investment that you already hold, capital gains tax is potentially payable when you pass it across to the child, even if you don’t actually sell the asset. This would only be the case however if your total gains for the tax year exceed the annual exempt amount of £12,300. If this is the case then capital gains tax would be payable at 10% or 20% of the chargeable gain, depending on whether you are a basic rate or a higher rate taxpayer.
If you find yourself in this situation, you may consider transferring assets to a spouse or civil partner if they haven’t used their annual exempt allowance of £12,300. The transfer between spouses or civil partners doesn’t attract capital gains tax, and they can then gift the shares on to a child or grandchild. Your spouse will however inherit your base cost for the investment when it comes to working out how much the gain is, and calculating if it falls within the £12,300 allowance.
Inheritance Tax and Gifting
Whether you’re gifting shares or cash to invest, you should also consider any inheritance tax implications your gift may have. You have an annual gift allowance of £3,000 which you can use without worrying about inheritance tax being levied on the gift should you die. That limit is not per person you gift to, but rather is a total for all gifts you make, excluding those to a spouse or civil partner.
There are some other IHT exemptions for gifts, which may account for some of the other gifts you make in any given year, for instance gifts made to a child or grandchild who is getting married, or gifts which are made out of ‘normal’ income and don’t affect your standard of living like typical birthday and Christmas presents.
However, if you exceed your annual gifting allowance then IHT may be due on the gift if you die within seven years, assuming your estate is worth more than the nil rate band for IHT. The tax works on a sliding scale, so if you die less than three years after gifting then 40% IHT would be due, but if you die between six and seven years after the gift then the tax rate falls to just 8%. After seven years, no inheritance tax would be due.
The benefits of a Junior ISA
You also need to be aware of a rule which means that children can only earn up to £100 in income each year on money or investments gifted to them by a parent. If they earn more, then all of that income is attributed to the parent, and so potentially taxable. This doesn’t apply to money gifted by a grandparent or other relative, and even for parents you can get round this problem by using a Junior ISA, which allows tax-free income and gains to be accumulated.
Indeed even grandparents and other relatives should consider the Junior ISA route, because when the child grows up they can roll over into an adult ISA and continue to enjoy tax-free benefits. Contributions to Junior ISAs must be made in cash, so if you’re looking to gift existing shareholdings they would need to be sold and then re-purchased within the ISA.
What about Premium Bonds?
For years Premium Bonds have been a popular present to give to children. It’s easy to see why – they add a fun element to saving through the monthly prize draw, and there’s always the very small chance you could be one of the lucky winners of a million pound jackpot.
However children have such a long investment horizon that they are ideally suited to stocks and shares gift, because they can ride out the ups and downs of the market over time. What’s more NS&I have cut the interest rate used to calculate the prize pool from 1.4% to 1% per annum – thats the rate of return you will get if you have average luck. Given such a measly return, the stock market looks much more attractive for long term savings than relying on NS&I’s random number generator, ERNIE.
3 funds to gift this Christmas
Liontrust Sustainable Future Global Growth – this fund invests across the global stock market in companies that are driving sustainable growth. If you want a green investment for your child’s future, this fund has proven pedigree.
Fidelity Index World – a simple passive fund which tracks the global stock market, and which you can ‘set and forget’. A low annual charge of 0.12% means you don’t have high costs eating into your investment year in year out.
Standard Life UK Smaller Companies Investment Trust – if you can ride the ups and downs of risky markets, smaller companies have proved an excellent place to be over the long term. By the time your children have grown up, hopefully some of the acorns in this portfolio will have matured into oak trees.
