24th May 2017 at 8:00am
Tax allowances – make the most of them
You give your grandchildren regular financial gifts – pocket money, Christmas and birthday money.
But what are your options when you want to invest the tooth fairy’s money or give them larger amounts of money for things such as university fees, a gap year or a deposit for a flat?
It matters to you that you help set them up for life and see them thrive – but how can you be as tax efficient as possible?
Take advantage of the small gifts allowance
Giving money to your grandchildren regularly and in smaller amounts can be an effective way to minimise your Inheritance Tax (IHT).
You can gift £250 to as many people as you want every year. You also have a £3,000 annual exemption. However, you can’t give both the £250 and £3,000 to the same person.
And if you didn’t use your exemption in the previous year, you can carry it forward, giving you £6,000 which is exempt from IHT.
Make potentially exempt transfers… but be aware of the 7-year rule
If you want to gift larger sums, these won’t be counted for Inheritance Tax purposes – as long as you survive for seven years afterwards.
If you don’t survive the full seven years, the money you’ve given as gifts would use some of your nil rate band (£325,000) available to offset against your estate.
However, gifts made from your surplus income could be immediately exempt from IHT if they are part of a regular pattern of gift giving and don’t reduce your normal standard of living.
Any gifts made without using these exemptions are inside your estate and could be subject to 40% IHT.
Use your pension to fund ‘Uni’ fees or property – just be confident you have enough left for yourself
Recent pension freedoms allowing you to take your retirement savings when you turn 55 could be a useful way to fund your grandchildren’s (or your children’s) education or help them with a deposit on a property.
Taking some of your tax-free cash – you can usually take 25% of your pension savings this way – to pay some or all of their costs means you get to see them benefit from an education without the heavy burden of student debt sitting on their shoulders.
With fees, accommodation and living expenses for a three-year course typically costing £67,000 according to the National Union of Students, studying at university doesn’t come cheap.
A word of caution here: Using your pension savings could set them up for life but you need to carefully consider your own retirement needs.
Is your pension pot big enough to be able to help them and still leave you with enough to last you through your retirement? What would happen if you need care in later life? It’s a major consideration.
Then there’s the fact that money inside your pension usually sits outside of IHT – and can sometimes even be passed on tax-free.
Think about the benefits of using a trust
Many grandparents intend to leave some money to their grandchildren in their Will but if you want them to benefit while you’re still around, using a trust to give them surplus income or capital could help them meet those university or property costs.
A trust can offer a number of advantages for grandparents who want to help out in this way.
As a trustee, you retain an element of control over the funds and how and when they are paid, while gifts made to the trust can reduce your estate for IHT.
Using a discretionary trust gives grandparents the greatest flexibility and control but the taxation is higher and more complex.
This complexity can be reduced if the trustees choose to invest in an offshore bond as it is does not generate income.
When the funds are needed to meet the university costs, for example, bond segments can be assigned to the grandchild. Any chargeable gains which arise after the assignment will be assessed against the grandchild who, as a student, is likely to be a non-taxpayer anyway.
Using an offshore bond within a discretionary trust provides a good match of control and tax efficiency.
Pay into their Junior ISA
While you can’t open a Junior ISA – known as a JISA – on their behalf, you can pay into a grandchild’s JISA within their annual limit, which is £4,128 for 2017-18.
That money can be invested in cash, shares or both, and belongs to the child when they turn 18. All gains earned are tax free, making it a tax-efficient way of saving for them.
One advantage is the JISA isn’t something they can dip into until they reach 18 but is theirs to spend as they want after that. And because those savings are theirs, they sit outside of your estate for IHT as long as you meet the 7-year and gifting rules.
Support their Lifetime ISA and Help to Buy savings
Depending on their age, giving money to a grandchild so that they can save into a Lifetime ISA could help them save for a property or top-up their pension savings.
Launched in 2017, the Lifetime ISA, can only be opened between the ages of 18 and 39, so you can’t open it for them. Your grandchild could save up to £4,000 a year and get a 25% government bonus on top.
There are a number of qualifying conditions which you can read about on Gov.uk.
Another option is giving them money for a Help to Buy ISA to help them get on the property ladder. As long as they are a first-time buyer they can save up to £200 a month and benefit from a 25% government bonus – that’s £50 on top of every £200 saved.
If they save the maximum £12,000, they’ll get a £3,000 bonus on top.
There are eligibility rules which you can read about here. An important one is that they can’t use it for a deposit as the bonus is only paid after a property’s completion.
Make use of a children’s bank account
Ideal for smaller amounts of cash, bank accounts are practical and easy for family and friends to pay money into but interest earned is usually low and inflation can eat into any returns.
One advantage is that giving younger children access to their savings can help them manage their own money.
Again, you need to need to follow the 7-year or gifting rules, as outlined above.
There are plenty of options to consider but it can be a complex area. It’s well worth seeking advice for your family’s circumstances so that you can make the most of your money, and their future.
The information in this blog or any response to comments should not be regarded as financial advice.
A personal pension is an investment and its value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future.
The information here is based on our understanding in May 2017. Your personal circumstances also have an impact on tax treatment.