The Bank of Gran and Grandad
Colin Dyer | October 01, 2019
Time to read: 3 minutes
Grandparents are known for their generous contributions to piggy banks across the country. But new research shows that nowadays, the help they give their families is more substantial than a crisp tenner in a birthday card.
Times are changing
This week it’s National Grandparents Day – a time to celebrate the role the older generation play in the lives of their families. Which can increasingly include passing wealth down – and not simply as an inheritance.
Inheritance as a concept is commonly associated with leaving money to loved ones after you pass away. However, depending on what your goals are, you can incorporate a living legacy into your financial plan, to begin gifting while you are still here to enjoy sharing your wealth.
This idea of a ‘living legacy’ can allow you to give a financial boost to the next generation in a way that works for your family. It can mean anything from pocket money to contributions to Junior individual savings account (ISAs) – and lump sums for older ones trying to start their adult lives in a world where the average UK home costs six times the average salary.
Since pension freedoms in 2015, the Bank of Gran and Grandad has got even busier. Now that many over 55s can take their pension savings more flexibly, this has given more opportunities to help grandchildren out with costs such as university fees and deposits for first homes.
Some grandparents feel they’ve worked hard over a lifetime to make their money – and that their children and grandchildren should do the same. Others are keen to help out where they can. If that sounds like you, then what are the best ways of distributing wealth to your family while you’re still alive – and lessening the impact of Inheritance Tax (IHT)?
You can make gifts of up to £3,000 a year to your loved ones, known as the annual exemption: the money will be exempt from IHT when you die. If you haven’t already used it, you can also take advantage of your £3,000 exemption from the previous tax year – and couples can give away double these sums.
On top of this exemption, you can make small gifts up to the value of £250 to as many people as you like, in any tax year. But you can’t give someone another £250 if you have given them a gift under the £3,000 exemption. You can also give wedding gifts free of IHT: up to £5,000 in cash to your children, and £2,500 to your grandchildren. Again, double these amounts if two of you are making gifts.
Other gifts could be subject to IHT at 40%, depending on their value and if you die within seven years – although taper relief may reduce the bill as the years pass. This is a complex area, tax rules and legislation on IHT is subject to change – seeking the help of a tax expert could help ensure you’re making the best choices for your circumstances.
Another way of keeping the doors of the Bank of Gran and Grandad open is by making gifts out of your income as part of normal expenditure. You need to show that any gifts are regular and that you have enough income to afford them and your usual day-to-day spending, without having to rely on your capital. It’s a good idea to keep a record of your income and your normal expenditure to support the claim made by your executors in the event of your death.
Save the day
Depending on your circumstances, and if you’d rather not just hand your money over, there are other options available. You could consider setting up a trust they can access once they reach 18. Any gifts over your £3,000 annual exemption will usually be subject to the seven-year IHT rule, but any growth is exempt from IHT.
You could also open a savings account in your grandchild’s name, as long as you have access to documents such as a birth certificate. Your grandchild’s savings will be tax-free, as long as the interest remains within their personal allowance. Junior ISAs are another popular way for grandparents to share their wealth with the younger generation. As a grandparent, you can’t open one yourself but you can make contributions up to the annual limit which is currently £4,368. The money in a Junior ISA can’t be accessed by the child until the age of 18.
Your 1825 Financial Planner will help you work out the best ways to share your wealth with your family. And if you have any questions about anything covered in this blog, we will be happy to help. Inheritance is a complex subject with lots to explore, so we’ll be looking at IHT, focusing on the rules on the main residence nil-rate band, in a future blog.
Investment returns aren’t guaranteed. The value of your investment can go down as well as up and may be worth less than what was paid in.
Laws and tax rules may change in the future. The information here is based on our understanding in October 2019. Personal circumstances also have an impact on tax treatment. The information in this blog or any response to comments should not be regarded as financial advice.