We know that 529s aren’t typically a great option for Americans in the UK, but you want to save some money for your kids – maybe for university, a first home deposit, or other long term goals, right? And maybe their grandparents want to start some kind of savings for them, too?
I’ve put together the options that I think make the most sense to explore further. Which makes the most sense will depend on the specific situation and goals, but hopefully this gets your started.
Saving or Investing?
First thing you need to decide if you’re saving or investing for you kids. Saving means that you don’t want to risk the capital, but you’ll be accepting lower interest rates – think savings accounts. Investing puts the capital at risk, in exchange for hopefully higher returns – think stocks.
Typically, you would consider investing for longer time horizons (maybe over 5 years), and saving for shorter ones, but your individual risk tolerance needs to be considered here. You can certainly do a mix, as well.
Interest rates tend to be pretty low on these, but a normal savings account is fine. There are specific accounts for kids, some with relatively good interest rates. Premium bonds are another good option that happen to be UK tax free.
You could look at a cash ISA (either your own, or a junior one in the child’s name), but between the low interest rates and UK tax allowances on savings, I’d rather use my ISA allowance for investing.
US savings bonds are another one that could be worth considering for long term savings – series EE bonds are guaranteed to double in value after 20 years, about a 3.5% interest rate, which is pretty good these days – if you take the money out before that, it’s a much lower rate, 0.1% as I write this. Obviously you’re locking up money for a long time at a moderate interest rate, and they’re taxable in both the US and UK, but could be a part of the solution. Sadly, you also have to deal with the archaic TreasuryDirect website…
UK savings bonds (gilts) might be worth looking at too, but don’t have the same guarantee, and interest rates are pretty low these days (writing in April 2021).
A few different options here – honestly, all have pros and cons, there’s no clear winner, so what is best for you will depend on exactly what you want to do:
- Junior ISA in your kid’s name: UK tax advantaged, need to have US-friendly investments (probably individual stocks) and are US taxable. Can’t get the money out before the child turns 18 (barring death/terminal illness), and once they turn 18, the money is theirs to do with as they please. Separate £9k/year allowance from your adult ISA allowance.
- Adult S&S ISA in your name: UK tax advantaged, need to have US-friendly investments, and are US taxable. Big advantages over the junior ISA are that you can get to the money any time, penalty-free, and you control the money – it’ll be a gift to your kid as and when you give it to them. If they’re blowing it all on partying, you can turn off the tap. Big con is that you’re using your £20k/year allowance for this, instead of your own retirement saving (only really an issue if you’re maxing out your ISA anyway)
- Taxable brokerage: US vs UK has pros and cons (see the link). No tax advantages, but no limits on how much you can invest or when you can get the money. Be careful that what you invest in is both US and UK tax friendly (HMRC reporting, PFICs, etc.)
- UK SIPP: As long as you are convinced a SIPP is a pension under the tax treaty, this can work for really long term investment – age 55 or 57, and that may go up further in the decades your child owns it. You could also use your own SIPP, if you’ll be at the right age when you want to give the money to your child.
- IRA‘s require earned income, so typically don’t work for this
Gift, Inheritance, & Estate Taxes
This all gets pretty complicated (I want to put together an intro in a future post), but the good news is that for most of the kinds of gifts that most people would be giving to kids, it’s not a big deal.
For gifts from US taxpayers, there’s an annual exclusion of $15,000 per recipient, per giver. If you do go over this, it will start to count against the $11 milllion+ lifetime exemption. Only once you exceed that do you need to worry about tax – if anybody involved has an estate approaching $11 million, seek professional advice!
For gifts from UK taxpayers, the system is a little different. There’s an annual exemption of £3,000 per recipient, per giver, and anything above this limit counts as part of the givers estate (there are a few other exemptions, the UK government has a good quick intro). But as long as the giver doesn’t die in the 7 years after the gift, there’s no tax due. If they do die within 7 years, it’s a tapered calculation, and depending on the overall size of their estate, there may be taxes due. Keep gifts under £3k a year or stay alive for 7 more years, and there’s nothing to worry about!
In both countries, gift and inheritance taxes are paid by the givers, not the recipients (with an exception in the UK, if you receive a gift and the giver dies within 7 years of giving it). Typically, there’s nothing required at all by the recipients, and no taxes payable.
What am I doing?
Not that you should necessarily copy me, but here’s my current thinking:
- All my current savings for my daughters is in a US taxable brokerage account – this is the proceeds from closing the 529 it used to be in, which happened to be a the same provider. Not an entirely deliberate decision, but a perfectly reasonable place for now.
- Depending how my S&S ISA experiment goes, I’ll consider ISAs for the girls as well, whether in mine or in a junior ISA. They’re too young for now to have any guess as to how mature they will be at 18, so I’m hesitant to do a junior ISA.
- In the future, I’ll also open child savings accounts for them, and probably use them as a component of their allowance/pocket money. I haven’t done much research yet – the older one is just realizing the concept of money, so this is a ways off (she knows not to buy Paw Patrol episodes on Amazon now, at least!)