The Bank of Mum and Dad is well known for providing a helping hand at those expensive times of life. But the Bank of Gran and Grandad is increasingly in business too with the average gift to each grandchild being over £9,000, according to research by Saga in 2017.
If you are keen to help your grandchildren financially, equity release could provide you with the funds to do so. In this blog, we look at some of the reasons for giving money to your grandchildren and the implications you need to consider.
Why give to your grandchildren?
Traditionally, we would save or invest money to build an inheritance for our children and grandchildren to receive when we die. But many people now decide not to wait and choose to pass on their wealth when it is most needed by their relatives instead. Inheritance Tax is also a big consideration for some and planning ahead can significantly reduce the liability.
Funds from grandparents could help with private school fees, university costs, driving lessons, a first car, holidays or travelling, a wedding and/or the purchase of a first home.
How to give money to your grandchildren
There are a number of ways you can do this including:
- Lump sum – If your grandchild is an adult, you could simply give the money directly to them. If they are still children, you would likely be handing over the cash to their parents. In either case, make sure the terms are clear.
- Regular payments – You may prefer to give smaller amounts over a longer period of time. As with a lump sum, make sure everyone involved understands the terms.
- Junior ISAs – You can contribute to a Junior ISA for your grandchild once it has been set up by their parent or legal guardian. A total of £4,368 can be saved into an ISA annually and the child will not be able to withdraw it until they are 18.
- Trusts – You can put money aside in a trust for your grandchildren, either with or without certain conditions. For example, with a “bare trust” the beneficiaries will automatically have access to the funds when they turn 18. However, under a “discretionary trust” the trustees – possibly your grandchildren’s parents – have the power to decide how the money is distributed. The law surrounding trusts is complex so it is advisable to obtain specialist advice from a specialist.
- Pensions – Believe it or not, you can actually start contributing to your grandchild’s pension when they are still a minor! A grandparent can deposit up to £2,880 per year per grandchild. With tax relief from the government of £720 on top, you can effectively contribute £3,600 a year. Your grandchild will not be able to access the money until pension rules allow them to do so. This is currently at the age of 55 but could change in the future.
Some implications to remember
It’s important to make sure you have enough money to fund your retirement and future care costs before giving any away. Things could get awkward if you’re caught short and try to ask for a refund further down the line.
If you are giving the money for a specific purpose make sure this is clear to your grandchild. Many people find money a difficult subject to talk about but being open about the terms of your gift from the beginning could prevent arguments later.
Depending on your circumstances, you may also wish to seek advice on whether your gift will affect you or your grandchild’s entitlement to state benefits in the future.
But perhaps the biggest concern people have when it comes to giving money to their grandchildren is whether or not they will have to pay Inheritance Tax (IHT) on the gift.
Inheritance Tax liability
IHT is a tax on the estate – which includes all property, possessions and money – of someone who has died. There is normally no IHT to pay if your estate is below £325,000 in value or if you leave everything above that threshold to your spouse or civil partner.
However, if your estate is worth more than £325,000 and you want to give money to other people, you could consider giving a “living inheritance” rather than leaving your estate to be distributed when you die.
This is because gifts given within the seven years before your death are still counted as part of your estate. IHT liability applies on a sliding scale over the seven years, starting at 40% if you die within three years of the gift and reducing to 8% if you die between six and seven years.
So, if you are a young grandparent and in exceptionally good health, you may feel confident enough to give money to your grandchild without worrying too much about future IHT liability. But if you are older or unsure about how IHT could affect you, always seek specialist legal and financial advice on the best way to proceed.
Gifts exempt from IHT
The good news is you will pay no IHT on:
- Gifts within your annual allowance – Everyone has an exemption of £3,000 worth of gifts each tax year. You can carry any unused annual exemption forward to the next tax year, but only for one year.
- Wedding or civil ceremony gifts – In addition to the annual allowance, you can also give wedding or civil ceremony gifts of £2,500 for a grandchild or great-grandchild.
- Small gifts – You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.
Equity release to assist grandchildren
If you are keen to help your grandchildren financially, then equity release could provide the means to do so. Provided you have paid off any secured loans, you can use your tax-free lump sum to help your family. With some equity release plans, you can still leave behind a guaranteed inheritance for your loved ones too.
It is important to take expert advice on equity release before deciding whether it is right for you. Contact us to find out more from one of our highly trained advisors.