Lots of people think of giving cash or gift vouchers as Christmas presents, but other financial gifts are often overlooked. People can give cash into savings accounts, contributions to investment accounts or even gift shares directly. We’ll look at some gifting options and how they stack up.

1. Premium bonds

There’s a lot going for premium bonds: you can save as little as £25; they are government-backed, so couldn’t be safer; and you have the added bonus that they might make your child or grandkid a millionaire. But, while the expected prize fund has improved recently, you’ll still earn less than a cash savings account and the bonds you buy could win nothing. With inflation still high that means the spending power of your gift will be eroded year on year, particularly if the recipient doesn’t cash the money in for a long time.

2. Cash savings account

If you want to put money in a cash savings account for a child, you’ll likely need the child’s parents to open the account for you (assuming that’s not you). You should hunt around for the best rate possible, and then make a note to check back on the rate in a year or two, as banks have a nasty habit of slashing the interest on offer and relying on people not moving their money.

Cash rates have risen recently, so you can get a decent return. But for longer-term savings inflation can eat into your spending power and you might be better off investing. That means if the child is young and has a long time until they’ll need the money, you should think about investing.

3. Junior Stocks & Shares ISA

It’s probably not going to get yelps of excitement when a child opens the gift, but investing is the ideal long-term place for money, making it a good option for people who are gifting money to younger children. And the pot can build up over the years to be an exciting amount once children turn 18. For example, someone who saved £25 a month from birth to the age of 18 would generate a pot worth £8,000, assuming growth of 4% a year.

But the downside is that the money can’t be accessed until the child is 18. Similarly, when they reach 18 they take control of the money, which means they could cash it in and go on a spending spree – despite your protests.

4. Junior SIPP

It will surprise many to know that even non-taxpayers can get pension tax relief, so you can put up to £2,880 into a pension each year for a child and it will be topped up by the Government to £3,600. If you paid in the maximum each year until they reached 18, and then didn’t make any further contributions, they would have a pension worth almost £410,000 by the age of 55, assuming 4% annual growth.

The fact that the pension is locked up for so long means you can be sure they aren’t going to raid the money but clearly the downside is that this is a very long-term investment, that the child won’t be able to benefit from until they are retirement age. Currently that’s 55 but it’s expected to rise and so it’s impossible to predict what it would be for someone who is a child at the moment.

5. Gifting investments directly

You can gift shares directly to a child or grandchild, but there are a few tax implications to think of. Any shares handed to children will be classed as a disposal for capital gains tax purposes, meaning that if you’ve made a gain on the investment you could be handed a tax bill for passing the shares on – assuming it’s more than any remaining CGT allowance you have. You’ll also need to consider the inheritance tax implications (see below).

You also need to think about the tax implications if the shares pay dividends and you’re gifting them to your children. Children can earn up to £100 a year in dividends free of income tax, but anything over this amount is taxed at the parent’s marginal rate. This limit doesn’t apply if the shares have been gifted by grandparents, other relatives or friends. One way around this is to hold the shares in a Junior ISA, but contributions to Junior ISAs must be made in cash, so you would need to sell the shares and then repurchase them within the ISA.

WHAT ARE THE TAX BENEFITS OF GIFTING?

There are potential inheritance tax implications if people gift money to others. In brief, it would only affect them if their estate is over their nil rate band and if they die within seven years of the gift, but you can read more about it in this article.

But 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. This is an effective way of moving money out of an estate and protecting it from IHT in the future. Any gifts over that amount will be subject to the seven-year rule.

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