How to choose the right financial gifts for your grandchildren
We speak to many clients who have excess income or savings in later life and who want to give their grandchildren a financial boost. It’s tough out there for the University leavers and it is getting harder and harder to get on the property ladder.
This doesn’t mean that your grandchildren shouldn’t be encouraged to work hard themselves, but if you can afford to help out, and at the same time reduce the inheritance tax liability on your estate, this might be a good idea.
Many of our clients, however, are concerned about the rules and want to ensure that they are keeping any gifting legal and above board, and rightly so!
So, how best should you go about this; when is the best time to make a gift to grandchildren, and what are the rules?
Small gifts of cash or a cheque for birthdays or Christmas are ways of making annual gifts, but there are other life stages when you can gift spare cash which will have a more lasting impact. This could be when they reach university age, when they want to buy a first home, or when they meet the love of their life and are worried about the costs of a wedding.
These turning points in their lives are very likely to be the times when a little help and financial support will be particularly helpful.
Will you get taxed on the money you give to your grandchildren?
There are rules laid out by HMRC which detail how much money can you give as a gift to grandchildren tax-free.
The ‘small gifts allowance’ enables you to give up to £250 free from Inheritance Tax (IHT) to as many people as you like, each tax year. However, you cannot use this allowance together with any other exemption when giving to the same person.
You can also give up to £3,000 per tax year that will be exempt from IHT, known as your ‘annual exemption’. If you haven’t gifted any money in the previous tax year, you can carry forward any unused allowance, enabling you to give up to £6,000 free from IHT.
You are also able to gift up to £2,500 tax free to a grandchild as a wedding or civil partnership gift.
Do remember though, that if your estate is below the nil rate band for IHT (currently £325 000 each) you can give away as much as you like, although we suggest that you are not so generous that you compromise your own security in so doing.
Also it is possible to gift larger sums, although the tax situation depends on how long you survive the gift. Gifts over the annual allowances are known as a ‘potentially exempt transfers’ and will only be completely free of tax if you survive for seven years after the date of the gift.
The seven-year rule and its impact on your nil rate band is complex and we recommend you seek advice from Magenta before any significant gifts are made.
Trusts in the Grandchildren’s names may also be suitable, but this can be complex and will require specific financial planning and tax advice.
How to open a savings account for grandchildren
You are able to open a savings account in your grandchild’s name, provided you have the right documents such as a birth certificate. Interest on cash paid in to a children’s account (by anyone other than a parent) is free of any tax, up to the child’s own personal allowance.
A common choice by grandparents is to make payments into a Junior ISA, as all interest received is tax free. While you cannot open this yourself as a grandparent, (only parents can open the account) you can make contributions up to the annual limit, which is £4,080 for 2016/17, increasing to £4,128 for 2017/18. Money held within a Junior ISA cannot be accessed until the child is age 18.
It’s also possible to buy premium bonds for a grandchild, with a minimum investment of £100.
The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always contact Magenta to get financial planning advice for your own particular situation.