The Bank of Gran and Grandad
According to recent research over a third of grandparents have given a financial boost to their grandchildren and a further third have plans to do so. The costs of raising children can be expensive; from the weekly food shopping, school uniforms and extracurricular activities, to University fees and helping to fund a deposit on a first home, but never more so than now, when house price affordability is reaching a crisis point and job security is a distant memory.
Wealth accumulates throughout our working lives and into retirement, so that older generations tend to be wealthier than younger ones. The instinct to support our families is always strong, along with the desire often to pass money directly to grandchildren. This can be a very efficient way of saving inheritance tax and, providing funds for grandchildren now can also allow grandparents to see and enjoy them benefitting in their lifetime. However, there are considerations to be borne in mind - first and foremost whether you can afford to part with the funds in the first place, tax savings should never be the main driver for any decision.
The main thing to watch out for in gifting to grandchildren is inheritance tax and structuring the gift. Grandparents must be mindful of their own tax position but there are many ways to give money to your grandchildren tax–free:
- The small gifts allowance lets you give up to £250 free from inheritance tax to as many individuals as you like each tax year.
- If you wish to give larger sums then you can give away £3000 to your grandchild, instead of, but not as well as, the £250 per year. This allowance is available to both grandparents and can be carried forward for one year if not used.
- If your grandchild marries or enters into a civil partnership then each grandparent can give a £2,500 wedding gift without tax implications.
- You can also make unlimited gifts ‘out of normal income’ provided a commitment is show, regular gifts are made and your standard of living is not compromised. This is a useful tool for helping with ongoing costs such as pension plans, school or university fees.
Help with education
School fees can be a huge financial strain on even high earning parents, but grandparents can make a significant difference, especially where there are assets which will be left to their son or daughter later on. If that son or daughter is paying school fees out of income, the gift can be accelerated so that those assets which would be inherited later are effectively used to fund the grandchild’s school or University fees, reducing the exposure to inheritance tax, and freeing up income for the parent. You can give directly to a grandchild, however care must be taken when doing so in order to protect the funds from other parties, for example a future partner and also against financial immaturity.
Trusts are a perfect way to make a gift for many reasons, for this can take advantage of tax savings but also enable the grandparent to retain control as well as providing for protection in the event of the divorce or bankruptcy of your grandchild. These can be perfect for setting aside a sum of money to be used at a later stage, perhaps where grandchildren are still young.
Getting on the property ladder
One of the biggest challenges for grandchildren trying to buy their first home is getting a deposit together and grandparents can make the difference, especially if they happen to be downsizing at a time when this occurs. There are a number of options when it comes to providing the support needed but thought must be given to how to structure that help and to ensure that the documentation is all in order to safeguard the funds from the various risks they may be exposed to.
Sometimes a loan rather than a gift is appropriate. Such a loan could be secured on the property title as second charge to a mortgage being obtained and provides a clear record of the sum lent and the basis on which it is to be repaid or released. This is not particularly tax efficient, as the loan would be considered an asset of the grandparents if it remains outstanding, but it does ensure that the funds can be reclaimed and kept in the family if necessary, for example if the property purchase marked the start of a relationship for the grandchild which later breaks down, or the grandparent is not convinced that they will not need the funds in the future. A loan can always be forgiven at a later stage.
If a gift is more appropriate then a declaration of trust can be prepared, setting out the amount of the gift to the younger generation and recording what is to happen to those funds on the sale or transfer of the property. The declaration can stipulate the way in which any equity is to be held and can be particularly useful when a grandchild is merely cohabiting with a friend or partner and there is concern over how long the living arrangements may last.
There are wider considerations than simply saving inheritance tax to consider. Relationship issues must be borne in mind, for example will you be able to benefit other grandchildren in the same way, can the grandchild afford to run the property by themselves or will there need to be further contributions and how will that grandchild’s spouse or partner feel if their grandparent co-owns a house with the grandchild.
Other taxes such as SDLT must also be factored in to ensure that the additional 3% rate does not apply for grandparents choosing to co-own a property with the younger generation.
As with all things, clear communication with your grandchild to manage expectations and taking proper advice is the best way to facilitate any financial assistance.