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The Bank of Grandma and Grandpa

How to give a helping hand financially to your grandchildren

For many years, adult children have been relying on the ‘Bank of Mum and Dad’ for financial help, to gain a further education or get on the property ladder. But even as they start their own families, it’s increasingly common for these adults to count on their parents’ wealth to secure the lifestyle they want for their children.

As a grandparent, you may be more than happy to help. But it takes careful planning to avoid unexpected costs, both by minimising tax (ensuring that as much of your gift as possible goes to your grandchild and not HM Revenue & Customs) and protecting against inflation (so that your gift retains its value as your grandchild grows up).

With that in mind, here are some of the ways you can lend a hand. All figures relate to the 2021/22 tax year.

Saving and investing products for children

1. Junior ISA

A Junior Individual Savings Account (ISA) is a savings or investment account for under 18s. Like other ISAs, the money within the account is protected from tax, so any growth or return is tax-efficient.

Only a parent or guardian can open a Junior ISA on behalf of a child but, as a grandparent, you can pay money into the account, which will belong to the child. They cannot withdraw any money until they turn 18.

There is a cap on how much money can be paid into the account in any tax year. That cap is currently £9,000 but may change in future tax years.

There are two types of Junior ISAs: a cash Junior ISA for saving, and a Stocks & Shares Junior ISA for investing. Each child can hold one of each, but the £9,000 cap on contributions applies across all accounts they hold.

When choosing between a Cash ISA or Stocks & Shares ISA, a key factor is how far in the future the child will have access to that money. If a child is currently under 8, they will not have control of their account for at least 10 years. Most cash ISAs don’t offer an interest rate that will match inflation over those 10 years, so the buying power of that money could be eroded. While stocks and shares ISAs are more likely to beat inflation over that period, they also come with the risk that the value of the investments within them could go down as well as up.

2. Junior SIPP

Another option when investing for children is a Junior SIPP – or Self-Invested Personal Pension.

While it may seem strange to start a pension for a child, pensions play a crucial role in tax-efficient wealth planning. Starting early gives your investments the best chance of long-term growth, so the money you pay in could be vastly increased by the time it is withdrawn.

As with any other pension, the government will add tax relief to any money you contribute into a Junior SIPP, which increases the value of your contribution by 25%. For example, when you pay in £80, the government adds £20 in tax relief, totalling £100.

While anyone can contribute to a child’s Junior SIPP, there is a cap on how much money can be paid into the account in any tax year. That cap is currently £3,600 (including tax relief), though that may change in future years.

The SIPP will be transferred into the child’s control when they turn 18, but they cannot withdraw money until they reach the retirement age. That age is currently 55, but for under 18s, will likely rise over time to 58 or higher.

It is important to note that wealth held within a Junior SIPP will count towards an individual’s pension Lifetime Allowance (LTA). This is the limit on pension wealth it’s possible to withdraw in a lifetime before paying a tax penalty. The LTA is currently £1,073,100 but rises slightly each year.

3. Junior investment account (bare trust)

Once a child’s tax-free allowances have been used, you’re still able to contribute more money towards their future using a junior investment account, also known as a bare trust. These accounts are managed by a trustee on behalf of the child until they turn 18.

Unlike an ISA or SIPP, bare trusts don’t offer protection from tax. While wealth within a bare trust isn’t tax-free, it is taxed as if it belongs to the child, rather than the person paying in. This usually means that significantly less tax is due, as the child has their own tax-free allowances and likely less taxable wealth.

Inheritance tax and gifting limits

However you choose to save or invest for your grandchildren, you’ll want to be sure that they won’t later pay tax on your gift.

Inheritance Tax is a tax payable at a rate of 40% on any wealth above £325,000 that you leave to someone other than your spouse, registered civil partner, or a charity. When leaving wealth to your children and grandchildren, Inheritance Tax is payable on wealth above £500,000.

It is not only payable on wealth passed on after your death, but also on wealth passed on in your lifetime, up to seven years before your death. However, certain gifts are exempt from Inheritance Tax so, by gifting within these limits, you can ensure that the whole payment will go to your grandchild as you intended.

In each tax year, your gifting limits are:

  • Annual gifts totalling up to £3,000
  • Wedding or civil ceremony gifts of up to £2,500 for a grandchild (or up to £5,000 for a child, and up to £1,000 for another person)
  • Additional gifts, such as birthday and Christmas gifts, of any amount as long as they come out of your usual income without affecting your standard of living

Choosing the right option

As you can see, there are some complexities that need to be considered when choosing how best to save or invest for a grandchild’s future. If you would like further information or to discuss your requirements, please contact us.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

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