Passing money directly to grandchildren: How it can reduce your potential Inheritance Tax bill

PUBLISHED: 16:11 25 April 2016 | UPDATED: 16:11 25 April 2016


You may be surprised to learn that grandparents gave a staggering £5-6 billion to their grandchildren in 2014

Louise Harrhy at Charles Russell SpeechlysLouise Harrhy at Charles Russell Speechlys

From the cost of the weekly food shopping, new school uniforms and extra-curricular activities to university fees and helping to fund the deposit on a first home; the cost of raising children can be expensive, to say the least. Wealth accumulates throughout our working lives and into retirement so that older generations tend to be somewhat wealthier than younger ones. The recent surge in house prices in Surrey, along with asset values which have provided additional wealth for many households, combined with the fact that numbers of retired people and those over the age of 65 have increased means that the current “grandparent” generation are particularly prosperous.

The instinct to support our families is always strong, along with the desire to pass money directly to grandchildren - luckily this can also be a very efficient way of saving Inheritance Tax (IHT). Providing funds for your grandchildren right now will not only let you see them benefit in your lifetime but may also reduce your potential IHT bill and skip an IHT generation. 

How to do it

The main thing to watch out for in gifting to grandchildren is IHT and structuring gifts. Grandparents should be mindful of their own tax position but there are lots of ways to give money to your grandchildren tax-free:

• The small gifts allowance lets you give up to £250 each, free from IHT, to as many individuals as you like each tax year;

• Alternatively, you can use your annual £3,000 allowance to give them money but this is instead of, not as well as, the £250 a year. This allowance is available to each grandparent each year and if not used, can be carried forward one year;

• You can also make unlimited gifts ‘out of normal income’ provided a commitment is shown, regular gifts are made and your standard of living is not compromised. This is a useful tool for helping with school fees, pension plans, university fees and living costs;

• If your grandchildren marry or enter into a civil partnership, each grandparent can give a £2,500 wedding gift without any tax worries.

Helping with educational costs

School fees have risen almost 300% in 20 years and school fees in Surrey can amount to well over £100,000 per child and are becoming increasingly unaffordable. It is a huge financial strain on even high earning parents to afford this out of income 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 these assets are used to fund the grandchild’s school or university fees or accommodation costs thereby reducing exposure to IHT.

Can you trust a trust?

Trusts are a perfect way to make a gift for many reasons, as not only can they take advantage of tax savings but you can hang on to control as well as protecting from divorce or bankruptcy of your grandchild.

If a grandparent wants to set aside a sum of money to help with a future property purchase for example, they could create a trust to ensure the funds are invested as they see fit in the meantime and also determine the most appropriate age of access.

So called ‘educational trusts’ can be used to benefit a child under the age of 18 in such a way to keep running costs low, and the child can call for the underlying assets once they turn 18. This is a very simple and easy way of providing funds for your grandchild using the child’s own tax allowances. We regularly advise on setting up such trusts and look for the best structures for the younger generation.

Getting on the property ladder

Often the biggest challenge for grandchildren trying to buy their first home is getting a deposit together and this is where grandparents can often make a difference, especially if they have downsized themselves which enables them to save IHT by reducing their own assets.

For the younger grandchild

Grandparents can pay into a savings account once a parent has opened it up. There are tax advantages of such payments being made by grandparents rather than by the child’s parents.

Grandparents have many options when it comes to helping their grandchildren but getting the correct advice at an early stage is crucial. At Charles Russell Speechlys, we have many years’ experience in advising how to maximise the options available for everyone’s benefit.

After all, wouldn’t you prefer to see your money being used by your own family instead of the taxman?

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