Grandparents can play an important role in their grandchildren’s financial future by saving and investing for them. There are multiple ways of doing this, and the best approach will depend on your individual circumstances and aims.
Before you start
When making any investment decision, it is important to review your financial position thoroughly. Ensure you will have sufficient means to meet your own needs while taking into consideration the fact that your needs may change in the future.
Communication is key
It is almost always a good idea to speak with your children (and your grandchildren if they are older) about your plans for your grandchildren. This is important to ensure that everyone understands how your assistance can be deployed most effectively and that your intentions are clearly understood from the outset.
Tax considerations and professional guidance
You should also be aware of the different tax implications of the various options. Children under 18 are still liable for income tax on their savings if they exceed certain levels and direct gifts and transfers can trigger liabilities under the inheritance tax regime if you die within seven years of making them (and in some cases there is inheritance tax payable straight away).
Some options to consider:
Trusts
Trusts can take various forms and as there are complex rules surrounding their creation and running, it is important to seek professional guidance.
Discretionary trusts give your trustees greater control over the assets and flexibility but are often burdensome and expensive to administer. They are also generally tax-inefficient, with any money you transfer into the trust over a certain threshold subject to an immediate inheritance tax liability and all income received by the trust subject to income tax at the trustees’ higher rate.
Bare trusts are relatively tax-efficient and are easier to administer and run. When the grandchild reaches 18 the trust ends and the grandchild is entitled to whatever is in the trust – which you may or may not be happy with.
Outright gifts
Small gifts exemption: You can make small gifts (up to £250 per gift) tax-free in each tax year.
Annual exemption: You are also able to give away up to £3,000 every tax year tax-free. Any unused annual exemption can be rolled-over from the previous tax year up to a maximum of £6,000.
Gifts out of excess income: If you earn more than you spend, you can give away the difference without attracting a tax liability, broadly so long as:
- There is a degree of regularity to the gifts (i.e. monthly, annually etc.).
- You are able to maintain your normal standard of living without falling back on capital assets.
Junior ISAs (JISA) and Child Trust Funds (CFTs)
JISAs and Child Trust Funds are both tax-efficient ways to save and invest for children. CTFs are no longer available to new applicants, but children who already have CTFs can keep them until they mature. In each case, you can contribute a maximum of £9,000 a year without attracting a tax liability for the grandchild, but you still need to be mindful of inheritance tax if you do not live for seven years.
In summary, there are lots of different matters to consider when saving and investing for grandchildren – both in terms of tax implications and also what you might wish to invest in, and the amount of risk you are willing to take on.
There is no substitute to taking advice from a professional to ensure you do this efficiently and effectively and so that you can avoid pitfalls.
James Mabey is partner at Winckworth Sherwood
