Over the past few years grandparents have been steadily fed a diet of news headlines that spell out how they’re the luckiest generation. Their children and grandchildren are likely to fare worse in the financial stakes.
For most loving grandparents, with the financial means to do so, this means a heartfelt desire to give whatever they can to help their loved ones on their own future financial paths. In fact, a staggering £5.6 billion was gifted to adult grandchildren alone in 2014. However, knowing how to make the right gifting decisions can be confusing. Gifting money to grandchildren shouldn’t be so complicated it puts you off. Let’s make it simpler.
What, Who and Why?
Before considering the specific nature of any strategy for gifting money to grandchildren, you need to carefully consider some key points:
- What do you have available to give?
Before deciding on the gifting strategy you need to have some idea of what you have available to give. In your generosity be careful to protect your own financial future.
- Who do you want to give to?
- Why do you want to gift money to your grandchildren?
There are a variety of reasons for giving that go beyond the simplistic view of giving out of ‘love’. Are you hoping to help with university fees or a first home? Would you like to know you helped out with the first car, or for education? Or do you simply want to give because you’d rather your grandchildren had it than the tax man? Identify your goals of giving.
Know the Rules
Once you’ve gained a good understanding of what you can afford to give, who your recipients will be, and why you want to gift money, then you can consider what you can and can’t do.
The Rules are of course tax related, and so can seem complicated so let’s try to simplify matters –
Firstly, understand your inheritance tax position:
If you think your estate, or share of a joint estate, will be less than £325,000 threshold then no inheritance tax will be due to pay.
So, it is only if your estate is worth more than the threshold inheritance tax would be triggered on any gifts you have made.
Remember that gifts are consider to be items of value, so its not only cash you must bear in mind when working out how much you have given in a particular year.
The standard rate of inheritance tax is 40% charged on the amount of your estate over the threshold.
Secondly, understand how much you can gift, exempt of Inheritance Tax:
- You can give away up to £250 per person each tax year as small gifts, as many times as you like (provided you have not used up any other gifting allowances for the person).
- Normal gifts such as birthday and Christmas presents.
- You can give away £3000 per tax year without this being added back to your estate upon death.
- Each tax year you can also give away wedding or civil ceremony gifts of £2500 for a grandchild or £5000 for a child.
- Payments to help with the living costs of a child who is under 18.
- A general principle is that you must be able to maintain your standard of living after having made the gifts.
So if I had to pay Inheritance Tax how does it work?
If your estate is worth more than £325000 and you had made gifts in previous tax years which were not exempt as describe above then tax is due as follows –
|Years between gift and death||Tax to be paid|
|Less than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
Please remember tax rules can change and the above, whilst correct at the time of writing may change in the future. Always check the latest rule.
Ways of gifting money to grandchildren
Once you understand all of the above, you’re ready to choose the practicalities of how to gift money to your grandchildren. Look beyond poor return bank accounts. Some products to consider include:
- Junior ISAs (JISA): usually run by banks and building societies, these are cash, stocks or shares saving plans for under 18’s. For current allowances on what you can pay in see here. At Shepherds Friendly Society, you can open the plan if you are the parent or legal guardian of the child, and we’ll accept contributions from anyone who wishes such as from family members and friends. Therefore, grandparents can’t open the plan but they can pay into it. Learn about our Junior ISA here.
- Young Saver Plan: this is Shepherd’s Friendly’s unique product that allows grandparents to open a plan for their grandchild to save for a minimum period of 10 years. It is tax-efficient and you can make monthly gifts of between £7.50 and £100. The beauty of this product is that we do the hard work of investing in a mix of assets for you, so that your grandchild gets the return on their investment with no income tax or capital gains tax on the growth of the savings. However, you should consider that, as this is an investment, returns are not guaranteed. Remember, when taking out any investment product your capital is at risk and you may get back less than you have put in. All references to taxation are to UK taxation and are based on Shepherds Friendly Society’s understanding of current legislation and H M Revenue and Customs practice which may change in the future. Click here for more information on the Young Saver Plan.
- Stocks and Shares ISA: You may also want to consider saving for a grandchild’s future in a tax-efficient Stocks and Shares ISA. Each year you can save up to £20,000 in a Stocks & Shares ISA. The savings plan aims to pay an annual bonus to help your savings grow, although as with any investment this is not guaranteed. You can pay in lump sums as an when you please or set up a monthly Direct Debit payment starting from £30 or more a month, which you stop, start, raise or lower whenever you like to suit your circumstances. Historically investing has produced higher returns than saving in cash, and this means that there is more potential to grow your money in a stocks and shares ISA than a cash ISA. If you choose this approach, remember to read up on the rules on gifting money to children, and don’t forget, your capital is at risk.
- Sustainable Stocks and Shares ISA: The Sustainable Stocks and Shares ISA works similarly to the Stocks and Shares ISA, with the key difference being that they’re invested in different funds. The Sustainable Stocks and Shares ISA is invested in innovative and sustainable companies that will not only grow your investment, but will also make a positive contribution to society.
- Traditional Options: Traditional options for giving money to grandchildren include National Savings and Investments schemes such as Children’s Bonds and Premium Bonds.
- Trust Funds: The ‘Child Trust Fund’ as such no longer exists, however old school trusts are still offered by some providers, and young people over 16 can now, until 2019, open Help to Buy ISA’s.
Children are the Future
Whatever you decide you can afford to give, at Shepherds Friendly we have a wealth of information that could help you to decide how best to gift money to grandchildren whilst making the most of your tax allowances, and ensuring your grandchildren get the very best start in life.