Tax and Giving Money to the Grandkids
10th June 2019
It’s basic human nature to want to look after your family. That’s why so many grandparents do all they can to give some extra financial help to their grandchildren. It can be as simple as forking over a little pocket money, or as grand a gesture as taking care of a wedding bill. Like everything else to do with money and tax, though, there are good and bad ways to go about it.
What does the taxman count as a gift?
When older folk start doling out huge wads of cash to their offspring, the taxman’s eyes tend to narrow. Somehow, HMRC got the idea that people have been passing on financial or other gifts to their families as a way of dodging Inheritance Tax on their estate after they died.
To put a stop to that, they changed the rules so people couldn’t just offload most of their money and valuables to relatives late in life. Basically, any such “gifts” you hand out in the last 7 years of your life can still bring the taxman to your beneficiaries’ doors.
What's the limit on gifts being taxable
It’s not all bad news, though (except for the part about you being dead, of course). You can use your £3,000 annual gift exemption to make sure the grandkids don’t get saddled with a sudden tax bill. For lower amounts, there’s also a small gifts exemption of £250, plus some fiddly rules around things like wedding-based allowances.
These essentially just make sure that the gifts aren’t counted as part of your estate for Inheritance Tax. There’ll probably be some bookkeeping involved, as there always is when you’re dealing with HMRC. Solid records of what you’ve given out will be a big help in keeping the taxman honest later.
Helping to buy property
Another possibility is helping a grandchild out with some of the more terrifying costs involved in growing up. A house deposit is a good example. An average deposit is now £33,00, according to recent Standard Life figures. There are different rules around gifted mortgage deposits that you will need to discuss with your mortgage provider or broker, though.
You’ve got to keep in mind that people’s lives and circumstances change over time, though. If your relative buys a property with a partner, but they later split up, their ex will still probably end up sharing ownership of the place you helped to buy.
Setting up ISAs, bank accounts and trusts
Of course, simply dropping raw cash on your grandchildren isn’t the only way to look out for their futures – or even the best, in many cases.
You could, for example, make them beneficiaries of your life insurance policy, or set up a Junior ISA for them. A JISA is pretty much the same as a regular ISA, in that there’s an annual limit on what you can save into it, but the interest is tax-free. As with normal ISAs, the sooner you get started saving the better off your relatives will be. Just opening one with the maximum allowance could see it worth well over £18,000 by the time your grandkid turns 18 – without you ever topping it up.
That’s based on the best current rates, of course. There are also stocks and shares JISAs, which can go higher but also come with more risk. Either way, the cash in JISA can’t be accessed until your grandchild turns 18, so you know they can’t be tempted to empty it out early. With the average student debt now edging over £50,000 young people are needing to make hard decisions about their futures earlier and earlier.
For the really future-minded grandparent, you could even open up a pension for your younger relatives. Obviously, the money will be locked away for several decades this way, but it’s a good investment in their future, and has all the usual tax advantages. Assuming 5% growth and saving the maximum of £2,880 a year, a pension opened at your grandkid’s birth could be worth well over £1 million by the time they hit 65!
However you decide to help out your grandchildren, it’s always worth putting some thought into making the most of the gifts you’re giving. Get in touch with all your tax questions and problems, and let us show you why your whole family’s better off with RIFT.