How grandparents can gift the maximum amount to their grandkids
Grandparents love to spoil their grandchildren at Christmas, whether those grandchildren are tumbling toddlers, learning to read the BFG or just back from their first term at university.
For many grandparents, this approach is mirrored in their desire to leave behind the wealth they have accumulated in their lives so it might support their grandchildren for their futures.
Of course, presents come in all shapes and sizes. And the good news is there are several ways to pass on as much of your wealth as possible, without losing an unnecessarily large portion of it through inheritance tax (IHT).
Of course it’s always helpful to speak with a financial adviser first as the right advice can make a real difference, especially when it concerns a topic as important as IHT. However in the absence of that advice here are three options you might wish to explore:
Give it away
One way to reduce the impact of a potential IHT bill is to simply gift your assets. There’s an annual gifting allowance of £3,000, which means cumulative gifts up to that figure, made over the course of the year, will immediately be exempt from IHT. And if the full annual exemption isn’t used in one year, the remainder can be used the following year, although it can’t be carried over beyond this.
Wedding gifts are free from IHT as well and you can gift up to £2,500 to a grandchild. You can also make other small gifts (up to £250) to as many different people as you like, but you cannot use your annual exemption and your small gift exemption on the same person in the same year.
Just be aware that lifetime gifts in excess of these small allowances will take seven years to be exempt from IHT. In addition, you won’t be able to access the assets you give away during the rest of your lifetime, which is a tricky decision given that we cannot predict for how long we will live.
Invest in companies that qualify for Business Property Relief
The government offers tax incentives to people who are interested in investing in small, unlisted companies, and are willing to accept the higher risk that goes along with such investments. In line with current legislation, provided these companies qualify for Business Property Relief (BPR), and the shares have been held for at least two years before you die, the investment can be left to beneficiaries free from IHT.
For those interested in investing in AIM-listed stocks that are expected to qualify for BPR, there is also the option of investing in an AIM ISA – meaning investors can undertake IHT planning within an ISA wrapper. Estate planning through an ISA can deliver other benefits too. For example, investors retain access to their investment, allowing them to target capital growth from lifetime taxes, take a regular income, or to dispose of their holding if circumstances change.
Set up a trust
The beauty with trusts is that they can be tailored to personal wishes. So you could potentially ring-fence capital in order to provide school fees for a grandchild, for example.
However, assets settled into certain types of trusts that are set up during a person’s lifetime also take seven years before becoming exempt from IHT. So, if you were to die before then, the amounts settled into trust will be included in your estate – that is the sum of your savings, investments and the market value of the house you live in.
If you haven’t yet discussed your IHT liability with a financial adviser, it’s worth booking a meeting with one as soon as you can in the New Year. They will help you understand your specific situation and outline the choices in front of you. It could result in your wealth helping to look after the grandchildren in your family for many years to come.
Simon Rogerson is chief executive of Octopus