How do I ‘gift’ money to my grandchildren?
There are many ways to use your wealth in safeguarding the future of your family.
After all, you can’t take it with you.
How to be Inheritance Tax (IHT) savvy
There generally are 3 options when it comes to gifting money to grandchildren:
- Annual Gift Allowance – you can gift up to £3,000 per year to one person or a combination of people with no IHT liability1.
- Potentially Exempt Transfer – you can gift any amount to anyone, just so long as you live for 7 years after the gift2.
- Normal Expenditure out of Income – if you have spare income, you can make a regular payment to your grandchildren which is IHT free.
While the first two options are self-explanatory, “Normal Expenditure out of Income” is one of the best options and generally overlooked. Firstly, you need to make sure you can afford to maintain the lifestyle you had prior to making the gift. Secondly, it has to establish a regular pattern, and finally you need to deem it as a regular gift from income, i.e. write it down!
You could choose any of the three options above that best suits your needs and circumstances, but once you have decided on how you want to make the gift, the next question is where do you make the gift?
Gifts for younger grandchildren
Junior ISAs
If you want to gift a lump sum or regular amount of money to your grandchildren, junior ISAs (JISAs) are a great way to do this. Currently (although this may be subject to change so it’s worth getting advice) you can save up to £9,000 in a JISA for each child3. Interest, dividends and capital gains are exempt from UK tax. You can also open a junior stocks and shares ISA which can generate returns. A JISA can only be opened by a parent or direct guardian, (although anyone can pay into it) and it can only be accessed when the child is 18.
Helping them on to the property ladder
You can act as a loan guarantor which can often help your grandchildren find a good mortgage deal or speed up the process. You will however be liable in equal measure to the owner of the property for mortgage repayments, in the event they can’t honour repayments.
A great way of helping your loved ones is by making a lump sum gift or loan to help with all, or part of a deposit for a property. Again, any gift over £3,000 will be subject to the ‘7-year rule’4. The only time this rule doesn’t apply is if the gift is paid out of income.
Helping with their education
You can help cover private education or university fees, or during your grandchildren’s university days, you could take the financial pressure off by paying them a monthly allowance. Paying for food shops, tuition fees or accommodation costs can also be a huge help during university when funds can be scarce.
You can also help them pay off their student loan(s) after graduation. The final amount payable may vary and taper depending upon their earnings so it’s worth getting good advice around this. Again, we can help you find an effective way of giving your grandchild a helping hand post-university.
Trusts
If you’re planning to help towards a deposit for a home to a younger relative and their partner, you may worry about your contribution if they separate. To counteract this worry and take practical measures, you can get a Deed of Trust created to protect your grandchild’s share of the property.
If you’d prefer more peace of mind around a larger financial gift, you have the option of create a Trust which allows you to stipulate how the money is used. This is a complicated undertaking however, so we recommend you seek professional advice when setting this up.
Paying into a pension on their behalf
Your grandchild’s retirement may seem like a long way off, but a great way of investing in their future is by paying into a pension known as a Junior Self-Invested Personal Pension. It is exempt from income tax and in most cases, inheritance tax. You can start paying into it from the day your grandchild is born, although they can only access it at the age of 57. This type of pension is also topped up by the government. A maximum of £3,600 a year can be paid into it, but with the government’s annual top up of 20% which is around £720, you will only have to pay £2,880 per year5.
Wedding gifts and token gestures
You can give up to £2,500 to your grandchildren as a wedding gift (£5,000 if you are the parents) and this is exempt from IHT6.
It’s worth noting that you can also give as many sums of £250 as you like (tax free) if the recipients are different each time7.
Property and Inheritance Tax
You can leave your property to your grandchildren but be aware of the taxes they may need to pay. Leaving a property worth up to £325,000 is tax free but anything over this is liable for Inheritance Tax (IHT) which is around 40%8.
There are ways in which you can reduce the amount your beneficiaries will have to pay in IHT:
- Should your gift be above the IHT £325,000 threshold and you live more than seven years on from the time of your gift, they are potentially exempt. The longer the time between you passing away and giving the gift, the less tax your beneficiary will have to pay9.
- Make sure you draft a Will with the help of a professional Wills Adviser. Making a detailed Will means your family can enjoy your legacy without running into undue complications. Our qualified Wills Adviser can help you with this.
Find out more
Our Independent Financial Advisers can help you with the options you have around giving a helping hand to your grandchildren.
Book your consultation with one of our independent financial advisers.
What matters to you, matters to us
1-2. https://www.gov.uk/inheritance-tax/gifts
3. https://www.lloydwhyte.com/news/new-tax-year-new-tax-allowance
4. https://www.gov.uk/inheritance-tax/gifts
5. https://www.aviva.co.uk/retirement/retired-life/how-to-help-your-grandchildren-save-for-the-future/
6-7. https://www.fwca.co.uk/inheritance-tax-on-wedding-gifts/
8. https://www.gov.uk/inheritance-tax
9. https://www.gov.uk/guidance/work-out-inheritance-tax-due-on-gifts
Lloyd & Whyte (Financial Services) Ltd are authorised and regulated by the Financial Conduct Authority. Registered in England No. 02092560. Registered Office: Affinity House, Bindon Road, Taunton, Somerset, TA2 6AA. It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. We cannot assume legal liability for any errors or omissions it might contain.
