Becoming a grandparent is a really exciting part of family life, and it is natural for many grandparents to want to be involved with the new arrival, both practically and financially.
Money from grandparents can really make a difference to a new grandchild’s life, whether it is ensuring that the parents can afford a more spacious family home, or paying for school or university fees in the future.
It’s easy for new grandparents to get confused about the best ways to give money when there’s a new arrival. The complexities surrounding inheritance tax (known as IHT) and other taxation issues mean that a simple wish to make life even better for family members can seem hedged around by red tape.
Understanding the rules can make it easier to make a difference, while at the same time ensuring you have enough money to fund your own dreams and plans. Here are some tips to help.
Think about when the money is needed
Depending on family circumstances, your gift may be needed at different times. If the family needs help now, or for school fees at the age of five, the right way to give the money will be very different from if you expect the children to use the cash for driving lessons or a housing deposit further down the line.
You may decide you want to wait and pass the money to grandchildren when you die, in which case it is still important to think about your giving in advance to avoid the taxman taking a large share of your generous gift.
If the money is needed now
If you’re giving money immediately, you should give it understanding the rules surrounding IHT. This tax is levied at 40 per cent on your estate if you die, so avoiding paying too much of it will make a big difference to your gifts.
Everyone has a nil-rate band for inheritance tax, but if your estate is worth more than £325,000, amounts over this level will be taxed.
Talbots Cardigan Talbots winter Boutique Boutique winter Giving away money takes it out of the IHT net, but only if you survive for seven years after you have given it away. However, there are some extra allowances that allow you to give more away and be exempt from this rule, so it’s worth ensuring you maximise these types of gift.
These include £3,000 of gifts per tax year (known as your annual exemption) as well as an allowance for small gifts. You can give wedding and birthday gifts away as well.
Giving little and often, under the £3,000 exemption, could be an effective way to avoid the tax.
If you’re only giving a small amount of cash, a child’s own bank account is a practical and easy way for family and friends to pay money into – but interest earned is usually low and inflation can eat into any returns.
One advantage is that giving younger children access to their savings can help them manage their own money. Again, you need to follow the seven-year gifting rules, as outlined above.
If the money is needed before 18
A trust structure is another tax-efficient way to give money to your grandchild, but keep some control over how it is used. Trusts can also help you to save on inheritance tax. Different trusts can be used at different times, so if you want to give money for school fees, for example, a trust structure may work.
As a trustee, you retain an element of control over the funds and how and when they are paid, while gifts made to the trust can reduce your estate for IHT. A combination of trusts and offshore bonds can be particularly tax efficient, but you will need to take specialist advice on this.
If the money is needed for university fees or driving lessons
A Junior Isa, or JISA, can be opened for any child under 18. At the age of 18 the money becomes the property of the child, but until then it grows free of tax.
While you can’t open a Junior ISA – known as a JISA – on your grandchild’s behalf, you can pay into a grandchild’s JISA within their annual limit, which is £4,260 for 2018-19.
If you want the money to be used for a housing deposit or pension savings
For older grandchildren, depending on their age, giving money to them that they can put into a Lifetime ISA could help them save for a property or top-up their pension savings.
Launched in 2017, the Lifetime ISA can only be opened between the ages of 18 and 39, so you can’t open it for them. Your grandchild could save up to £4,000 a year and get a 25 per cent government bonus on top.
Children can also have pensions, and anyone can contribute to those savings to a maximum of £2,880 a year and get 20 per cent tax back. It is topped up by the government to £3,600 a year, and means that your grandchild may not have to worry so much about saving for old age later. The earlier you start, the longer the money has to grow, so a small amount could make a real difference now.
However you choose to contribute to your grandchildren’s financial well-being, this can be a really exciting way to help your children at a new stage in their lives.
Moments that matter
Life can be unpredictable – but by making the right savings choices now, you can make sure you will be able to enjoy the moments that matter.
winter Dress Casual Kay Boutique Unger YqIXxdwY
That is why the Telegraph has teamed up with Standard Life, who has been looking after their customers’ life savings since 1825. Today, Standard Life prides itself on helping you make the right choices for your future.
To find out how your finances could help build your future, visit standardlife.com/future
Investment risks apply.