Helping with your grandchildren's future

Giving money to your grandchildren isn’t just a simple gesture of kindness—it’s a meaningful way to show your love and support for their future.

This approach provides individuals with a valuable financial head start, setting the foundation for a more secure future as independent adults. In addition to fostering personal growth and stability, it serves as a strategic method to minimise your estate's potential Inheritance Tax (IHT) liability. This enables a greater portion of your wealth to benefit your family, rather than being diminished by taxation.

The younger generation today is confronted with a challenging financial landscape. Escalating living costs, soaring property prices, and increasing student debt have made achieving financial security and reaching significant life milestones, such as purchasing a home or starting a family, more difficult than ever. Additionally, economic instability and an unpredictable job market further intensify the pressure.

For many, the journey to financial independence resembles an uphill battle. By directly gifting money to your grandchildren, you provide them with an opportunity to overcome these obstacles and make meaningful progress toward their aspirations.

Instead of waiting for wealth to trickle down through their parents, your contributions can create a tangible impact now—whether it’s assisting with a deposit for their first home, covering educational expenses, or enabling them to build savings for the future. This approach not only fosters a positive and lasting influence on their lives but also offers you peace of mind.

Simplify your estate and reduce the burden of inheritance tax (IHT)!

Leaving money to grandchildren through your will is a consideration for many, but it is not always the most tax-efficient option. Funds transferred in this manner become part of your estate, potentially increasing your inheritance tax (IHT) liability. Moreover, this financial support may arrive too late to have the desired impact, such as assisting them through university or enabling them to purchase their first home.

Instead, consider several alternatives that allow you to provide financial support while you are still present. These options not only help reduce the size of your estate and its IHT liability but also offer immense personal satisfaction as you witness the positive impact of your gift.

Choosing the Best Method to Give Money as a Gift

 When deciding how to gift money to your grandchildren, several important factors must be taken into account. Their age plays a crucial role, as does your desire to support specific milestones such as education expenses or property ownership. Additionally, your personal financial situation and long-term goals should influence this decision, along with a careful consideration of inheritance tax (IHT) implications. The tax treatment of various gifting options can vary significantly, making it essential to seek professional financial advice. This will help you understand the implications and ensure that your plans align with both your intentions and legal requirements.

Junior ISAs: A Path to Building a Secure Future

 If your grandchild is still young, a Junior Individual Savings Account (JISA) can be an excellent tool for investing in their future. Although only parents or legal guardians can officially open a Junior ISA, anyone is permitted to contribute up to the annual limit of £9,000 for the tax year 2024/25. These funds can grow tax-free, providing a valuable financial resource when your grandchild turns 18.

Junior ISAs are particularly attractive because they offer a structured approach to saving. Whether it's for covering university expenses or funding a gap year, the funds will support their financial needs as they transition into adulthood. Just keep in mind that once they reach 18, the money becomes theirs to use as they wish.

It's also important to note that a child with an open Child Trust Fund (CTF) is not eligible to hold a JISA unless they first transfer the CTF funds to a JISA and close the CTF.

Understanding the use of a Bare Trust

 One alternative to consider is a bare trust. With no investment limits, this option allows you to set aside funds for your grandchild’s benefit. Bare trusts can be utilised for specific purposes, such as covering private school fees, before the child reaches the age of 18. However, once they attain adulthood, the remaining funds become theirs to manage.

Gifts made into a bare trust by grandparents offer a distinct tax advantage. The assets within the trust are taxed as if they belong to the child, which can result in minimal or no tax on income or gains. Nevertheless, it is advisable to seek professional guidance to ensure that any arrangement functions as intended.

Regular Gifting and Tax Efficiency

 Recurring contributions to a Junior ISA or bare trust may qualify as 'normal expenditure out of income,' thereby exempting them from Inheritance Tax (IHT). To satisfy the criteria, these payments must be consistent, derived from your income (not capital), and should not affect your standard of living. This approach provides an efficient means of financially supporting your grandchildren while effectively managing your estate's IHT exposure. Whether the funds are allocated for school fees, savings, or investments, they can offer significant assistance during critical phases of their lives.

Supporting Older Grandchildren with Immediate Needs

 For older grandchildren facing immediate financial needs, outright gifting may be a more appropriate option. Currently, the law allows you to give up to £3,000 annually in gifts without these amounts being considered part of your estate for Inheritance Tax (IHT) purposes. If your grandchild is getting married or entering a civil partnership, this limit increases to £2,500. Additionally, planning for larger gifts, such as a house deposit, presents further opportunities. These larger gifts are classified as 'potentially exempt transfers.' As long as you survive for at least seven years after making the gift, it will not be included in your estate for IHT purposes.

Making use of surplus income

 If you have surplus income, consider using it to fund recurring gifts for your grandchildren. These contributions can serve various purposes, such as covering private school fees, which not only provide immediate family benefits but also offer an inheritance tax (IHT) exemption.

Alternatively, you may choose to allocate surplus income towards a whole-of-life insurance policy. When structured properly, this policy can address your estate's IHT liability, thereby maximising the amount you pass on to your family members.

However, navigating the financial and tax implications of gifting money to your grandchildren can be complex. Therefore, careful planning is crucial to selecting the most suitable options, understanding tax benefits, and structuring gifts in the most advantageous way.