Spoiling the grandkids is one of the great joys of being a grandparent as I see from personal experience with my parents and their grandkids. But they also really want to help out and often it’s by gifting money to the grandchildren for their future. Initially my parents gave something to each of them on their birth, but later they offered to help put some money aside to pay for a bit of their university fees.
Here I discuss a few of the options available to give to grandchildren and some of the issues to think about, in particular touching on inheritance tax which, with the increase in house prices over the last decades, more and more people are paying.
Different ways to save for grandchildren
1. Open a Savings Account
With the right documents to prove the grandchild’s identity, grandparents can open a savings account for their grandchild in the child’s name. Depending on your goals and time frame, this could be an instant access account; a notice account where you have to give a period of notice before withdrawing but in return the interest rate may be higher; or fixed rate bonds which pay a fixed rate of interest but the money is locked away for the length of the bond.
With an interest bearing account, you have the certainty of the rate of interest you will earn and there is little risk of losing the money. However if your goals are longer term, for example putting money away to pay for their university fees, then financial advisors often suggest considering investing rather than saving. This is because over the longer term investments can provide greater returns, albeit with greater risk.
2. Put money into a Junior ISA
Money invested or saved in a Junior ISA is normally free of income or capital gains tax. The account is in the child’s name and cannot be withdrawn by them until they are 18 so is ideal if you would like to help your grandchildren when they are a little older.
Only the parent or legal guardian can actually open a Junior ISA but once open contributions of up to £9,000 each tax year in total can be made by anyone. Beanstalk offers a stocks & shares Junior ISA and makes the whole process really simple for grandparents and parents to do. If you are a grandparent, you can register the child on the Beanstalk app and then have us send a message to the parent letting them know you want them to set up the Junior ISA. Once done, you will see your grandchild’s account on your app and you can use all the tools on Beanstalk to make contributions. The child’s parent can give you full access to the same account information they see so you can see how everything is going.
3. Give grandchildren premium bonds
Premium Bonds are a savings product offered by NS&I which is a state owned savings bank in the UK. Premium Bonds do not pay interest, instead there is a monthly prize draw for a tax-free prize and each Premium Bond has a chance of winning a prize.
Grandparents can buy premium bonds in a grandchild’s name and we discuss the pros and cons of premium bonds in more detail in our Premium bonds vs Junior ISAs article here.
4. Set up a Junior SIPP (Self-Invested Pension Plan)
Although it seems a little early to think about a grandchild’s retirement on their birth, it is possible to set up a Junior SIPP for a newborn although, as with a Junior ISA, this must be done by the parent or legal guardian.
You can contribute up to £2,880 each tax year and the government will add 25% to this in tax relief but the downside is that it cannot be accessed until the child is 55 at the earliest.
What are the tax implications of gifting money to grandchildren
There are of course no restrictions on a grandparent giving money to a grandchild but there can be some tax benefits to doing so, particularly with respect to potential liability to inheritance tax.
Inheritance tax is a tax paid at a rate of 40% on the value of a person’s estate when they die. Inheritance tax is not paid if the estate is left to a surviving spouse or civil partner (although on their death their estate may be liable) and there is a tax free allowance, currently £325,000, so that tax is only paid on amounts above this. Given the tax free allowance, only some people end up paying inheritance tax although this number is going up.
Giving money away does not automatically reduce the value of your estate for inheritance tax as there is a rule that if you die within 7 years of making the gift, the gift is counted as being part of the estate and will be taxed. The rate of tax varies depending on how long ago the gift was made. If within 3 years of your death, the rate is the full 40% and then it drops each year so that between 6 and 7 years it is 8% and then after 7 years no tax is due. This is known as “taper relief”.
As well as taper relief, you also have a gift allowance of £3,000 per tax year and any gifts up to this amount (in total across all individuals) are free of tax on your death.
What this all means that if you make gifts to grandchildren of up to £3,000 (in total across all of them), then these will not normally be liable to inheritance tax. Gifts beyond this amount are potentially liable under taper relief depending on how long before your death they were made.
So in summary gifting to grandchildren can really get them off to a great start while at the same time potentially save tax later on.
Please note: tax treatment depends on your individual circumstances and the rules around inheritance tax are complex and may change. We do not provide tax advice so if you have any questions, you should talk to an appropriately qualified tax advisor.