Many grandparents are keen to pass on their wealth down the generations, and particularly to grandchildren, but there are challenges that a good wealth manager could help you address. Below, I outline some common scenarios and come up with some practical pointers on how grandparental wealth can be passed on within the family in a tax-efficient manner.
Investing for a young grandchild’s education or house deposit
Children cannot own shares except through a Junior Isa (Jisa) or a pension (see box below). A Jisa must be opened by a parent/guardian, but anyone, including grandparents, can invest up to £4,128 a year (£4,260 from April) in it. The money is locked away and grows tax-free until the child is 18, at which point they can take control of it and do whatever they see fit – perhaps putting the money towards higher education fees or their first car.
Alternatively, a grandparent could give the child’s parents money to invest on the child’s behalf and use at their discretion, but any income and realised capital gains will be assessed to the parents for tax purposes.
Another alternative is to consider setting up a bare trust, where the parent holds the assets as trustee for the child. The child takes advantage of their own income tax and capital gains tax allowances, and money is protected in the event of divorce. Funds must be used for the child’s benefit, but there is useful flexibility: they might cover school fees, but also uniforms and trips. Moreover, there are no limits as to how much can be put in a bare trust. Again, though, the child has the right to take control of the money at 18.
Helping an adult grandchild save for a house or pension
You can give as much money as you like to your grandchildren – whatever their age – but there may be inheritance tax (IHT) issues. Under Potentially Exempt Transfer (PET) rules, if you die within seven years of making a gift, it could be subject to IHT: any tax liability tapers over the seven years, from 40 per cent at the beginning to, potentially, 8 per cent in the final year. Be careful not to be pressured by concerns over dying within that seven-year period into giving too much too soon, possibly jeopardising your own financial situation in later life.
A safer alternative for most people is to give smaller sums: everyone has an ‘annual exemption’ of £3,000 worth of gifts they can make each tax year. Unused allowance from the previous tax year can also be utilised, so you could gift up to £6,000 in a single year.
Wedding gifts of up to £2,500 for a grandchild or great-grandchild are allowed, and you can also give any number of gifts of up to £250 per person during a tax year, as long as another exemption has not already been used on the recipient. Again, couples can double up on both these allowances.
An under-used facility worth considering is ‘gifts out of normal expenditure’. Document how much of your annual income you spend. You can give the surplus away without the PET rules applying, as long as you can prove you can maintain your usual standard of living.
Regular monthly giving is a good way of demonstrating the affordability of the gift (and there are no limits). You could contribute into a Lifetime Isa – you can invest up to £4,000 a year from when your grandchild reaches 18 until they are 40. The government will add 25 per cent each year, but it must be for a first home or pension.
Leaving a lump sum in a will
The less your estate pays in IHT on your death, the more there is to leave. Money in a pension fund is free of IHT, so prioritise drawing income from Isas and other savings over any pension fund. The new residence nil rate band means many couples with estates of less than £2 million will be able to pass on up to £1 million tax-free, but the house (or its value, if it has been sold) must go to a lineal descendant.
If you have concerns about IHT, consider Joint Life Last Survivor life cover to provide an IHT-free cash pot and to meet any IHT commitments in advance of probate. Finally, review your position with a financial adviser regularly because the rules, and indeed your circumstances, will change over time.
Charles Calkin is a financial planning consultant at James Hambro & Co.
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