Gifting money to grandchildren

Grandparents are often keen to contribute to their grandchildren’s savings as a way of rolling wealth down the generations and saving tax.

Cash may seem like the safest option but there is a risk interest will not keep up with inflation and a child’s fund may be able to buy less in future than they could today.

Stock market investments have historically outperformed cash over the long term but are riskier – they will fall as well as rise in value and a child could get back less than invested.

Please remember that past performance should not be seen as a guide to how investments might perform in future.

Ways to invest

Most accounts for children must be opened by a parent or legal guardian, but there are exceptions.

• Junior ISA

Free from UK income and capital gains taxes. Once opened by a parent or legal guardian, anybody can top up, until the annual savings limit of £4,368 (in total) is reached. It will convert to an adult ISA at age 18.

• Junior Investment Account

Can be opened by a grandparent. Assets are held ‘in trust’ for a child until they turn 18, although earlier withdrawals are possible if they are used for the benefit of the child and are normally taxed as if they belong to the child. Can be useful for inheritance tax (IHT) planning.

• Junior SIPP (pension)

Free from UK income and capital gains taxes. Once opened by a parent of legal guardian, anybody can top up. Benefits from 20% tax relief on contributions up to the annual limit. A gross contribution of £3,600 (the maximum for most children) will only cost £2,880.

Inheritance tax planning

IHT at 40% is applied to the estates of those who have died above a certain threshold, currently set at £325,000.

It is possible to lower or even completely remove a potential inheritance tax bill on your estate by giving away money or assets before you die.

Understand the rules

Individuals can give away £3,000 worth of gifts each tax year through their ‘annual exemption’. They may carry any unused annual exemption forward to the next year – but only for one year.

There are also special allowances for wedding gifts, up to £5,000 for a parent or £2,500 for a grandparent, and small gifts worth up to £250.

When money or assets are paid into an account for someone else’s benefit (such as a child’s), this is treated as a gift. Some gifts are free or exempt from inheritance tax, others may be subject to it.

Remember, tax rules can change over time, and the value of benefits will depend on the child’s circumstances.

Rather than waiting for your will to distribute assets from your estate, please contact one of our advisers to talk about the tax efficient ways these assets can be distributed.