We have four grandchildren. We have decided to start savings plans for their futures. Their ages are 18yrs, 11yrs, 8yrs and 4yrs respectively. My age is 75yrs, and my wife is a little older. What should we do, please?
Martin: It’s always good to hear about grandparents wanting to give a helping hand to the future generations. In general terms, there’s a lot of wealth inequality between the post-war ‘baby boomer’ generation and youngsters of today, with the future looking rather bleak (financially) for kids growing up. A combination of high living costs, large student debts and unaffordable property prices makes a wealth transfer the only way most children growing up today will be able to afford a secure financial future.
The range of ages of your grandchildren pose some challenges from a financial planning perspective, in terms of how you treat them fairly, allocate money to different levels of investment risk, and consider tax planning for both them and you.
Let's start with some inheritance tax considerations for you. During your lifetime, you each have a £3,000 annual ‘gift allowance’. You can carry unused gift allowance over from one tax year to the next, so if you’ve not made gifts before you’ve got the potential to gift up to £6,000 in the first year. There are some other tax-free allowances for inheritance tax purposes, including gifts worth less than £250 (although this can’t include gifts to anyone who has benefited from your annual gift allowance) and wedding gifts of up to £2,500 to a grandchild.
Perhaps the most useful inheritance tax allowance is gifts made out of any surplus income you have. These need to be regular gifts and you have to demonstrate that making the gifts doesn’t reduce your standard of living. Regularly paying into a savings or investment account for your grandchildren is likely to benefit from this surplus income allowance and the best way to demonstrate affordability is working with a Financial Planner to construct a lifetime Financial Plan.
Once you have decided how much to gift, for the three younger grandchildren you could contribute to their Junior ISAs. Their parents would need to open these accounts on their behalf, but once open you can contribute towards the maximum savings limit of £4,128 this tax year. This money is then invested tax-free until the child reaches their 18th birthday, at which point they have full access to the cash, but could (with some parental guidance) choose to roll the money over into an ordinary ISA.
With interest rates so low at the moment, putting this money into cash is likely to be unappealing. Instead, you could invest the monthly contributions into an investment fund spread across a range of investment assets, to help reduce the risk. The act of investing money also helps to reduce risk over time, a process known as pound cost averaging.
For the 18-year-old grandchild, your options are a little more limited. You could speak to a solicitor and create an 18-25 Trust, which restricts access to the cash until they reach their 25th birthday. From a tax perspective, this means any income within the trust is subject to income tax at the trust rate of 45% on gross non dividend income exceeding £1,000, or at 37.5% on dividend income. Depending on the size of the gifts, it’s unlikely that any income tax will be charged. Capital gains tax should also be within the trust’s annual allowance, which is £5,650 in the current tax year, unless you are making substantial gifts.
Alternatively, you might agree to pay towards their living costs whilst at University or during their first career, for a period of time. If they are still in full-time education, this category of gift is free from inheritance tax too.
Martin Bamford FPFS
Chartered Financial Planner
SOLLA Accredited Later Life Adviser
Managing Director, Informed Choice Ltd