Putting money aside for your grandchildren

Grandfather and Grandchild

We’re frequently asked about saving for grandchildren. The answer can be simple, if you’ve straightforward objectives and only a little to put aside, or rather complex if you wish to control the use of the money and have sizeable funds to pass on.

The simple scenarios

If you have modest gifts to make, perhaps out of income, and you’re happy for the grandchild to have the money once they’re 16-18, it’s hard to see beyond a few solutions such as:

  • Junior ISAs – a Junior ISA can receive contributions from anyone of up to £4,128 a year and the child can’t touch the money until they’re 18. Note, however, that only the parents/legal guardian can open the Junior ISA.

  • Premium Bonds – grandparents can purchase National Savings Premium Bonds in the name of their grandchildren. Each £1 Bond enters a monthly draw to win a £1 million jackpot and many other tax-free prizes. Control of the Bonds remains with the parent or guardian until the child is 16.

Until recently[1], Children’s Bonds were offered by the Government-backed NS&I and could be purchased in the grandchild’s name by the grandparents. The most recent issue (36) offered 2% interest tax-free AER on any amount invested between £25 and £3,000. However, NS%I have now announced that these bonds will be withdrawn on maturity and to new savings from September 2017. Instead, their focus is on the launch of the Junior ISA (see above), although their 2% interest offer is far from market leading, with a number of leading high street banks and building societies offering JISAs with an interest rate of 3% or more.

Inheritance tax is unlikely to be much of a consideration if you’re making modest contributions from spare income. Remember that you can make a single gift of £3,000 each year and innumerable gifts to others of up to £250 each year, without suffering an IHT liability on the gifts.

Pensions - The long-term scenario

This is certainly the long-play for grandchildren and may not win you many brownie points in your lifetime, but it’s certainly an option for grandparents. The parents would have to open the Junior Pension, but contributions of up to £2,880 per year will attract basic rate tax relief meaning that up to £3,600 inclusive of tax relief can be put aside each year.

Under the current rules, the pension pot cannot be accessed until age 55, so it’s definitely a long-term gift. But when they do reach 55, they may just raise a glass to our memory!

The complex scenarios

If you have significant capital sums to pass onto your grandchildren and you aim to do so while minimising inheritance tax, then trusts start to come into the picture.

Let’s start with inheritance tax. You can pass on unlimited capital to grandchildren during your lifetime (termed potentially exempt transfers), but unless you survive for seven years after the gift, the monies will be subject to IHT. So why bother with a trust? Here are a few reasons:

  • Access to the money – unless the gift is made through a trust, the grandchild can access the money as and when they wish (subject to any tax-wrapper rules e.g. Junior ISA’s). With a bare trust, the beneficiaries are absolutely entitled to the monies when they’re 18. But with a discretionary trust, the monies are under the control of the trustees until they agree an appointment.

  • Uses of the money – with discretionary trusts, the trustees decide when, and for what purpose, the monies may be used. Even if you’re not a trustee yourself, you can provide the trustees with a letter of wishes identifying to whom and when you’d like the benefits to be paid. Such a letter wouldn’t be legally binding, but will provide clear guidance.

  • Beneficiaries – with a discretionary trust, the beneficiaries need not be named but can instead be a class of individuals, such as your blood grandchildren. This would allow the monies to be set aside now for future grandchildren.

Inheritance tax is still an issue for gifts into trusts, depending on the amounts involved and, with bare trusts, the gift being a potentially exempt transfer.

The more control you wish to exert via the trustees over the timing and use of the settlements, the more complex the trust required. And with complexity comes cost. Discretionary trusts are rarely a DIY operation. For starters, you should undertake a full personal financial planning exercise to determine whether a trust solution is appropriate for you and your circumstances. Only then should you consider setting up a trust, with all its attendant complexities and costs.

The Financial Conduct Authority does not regulate Trusts, Estate Planning or National Savings and Investments products.

 

[1] http://nsandi-corporate.com/nsi-launches-new-junior-isa/ - August 15th 2017

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