Julie Man offers some practical advice for making tax efficient gifts so that your generosity goes even further in the Elmbridge Lifestyle Magazine August issue.
Grandparents are generous with their time, their wisdom but also increasingly with their financial support. Supporting grandchildren to fulfil their ambitions is at the heart of this lifelong relationship. It starts young with a present in a birthday card and often builds up to helping to fund a wedding or a house purchase.
Let’s look first at the simple option. If you want to gift money completely free from inheritance tax you need to keep within your annual allowance of £3,000 a year. If you didn’t make any gifts the previous year then you can bring one unused allowance forward and gift a maximum of £6,000. Alternatively you can give as many small gifts as you like as long as these don’t exceed £250 to each person.
Step things up
You can gift larger amounts of money to grandchildren providing you survive seven years from the date of the gift. They might come to you looking for help to get on the housing ladder, in line with the increasingly growing trend in recent years of assistance from the Bank of Mum and Dad, or in this case the Bank of Grandma and Grandpa. In this event the sums can be quite significant. You can afford to be generous as long as you survive seven years from the date of the gift. After the seven years has passed then the amount gifted will fall outside of your taxable estate. That’s good tax planning. Don’t let this stop you from being generous however – as long as you survive three years from making the gift the tax situation steadily improves and you will never face any form of punitive taxation for making these gifts. So it’s best to make the gift and get that clock ticking!
Savings add up
You are able to open a savings account in your grandchild’s name, provided you have the right documents such as their birth certificate. No interest earned on cash paid in by a grandparent is subject to tax up to your personal allowance which is £11,850 for the current tax year. This is a very generous provision when you compare it to what parents can contribute to in the way of savings. In contrast only the first £100 on interest earned on money paid in by a parent each year is tax-free.
Something to celebrate
Weddings are a joyful family occasion and even the tax man is in a good mood! Grandparents have a special exemption and can gift £2,500 to the happy bride or groom in addition to all their other annual exemptions!
Source of payments – got any extra income?
When most grandparents think about gifting they naturally consider one off sums, we call these capital payments, but if you are in the fortunate position of having excess income you can think about gifting this in addition to all the other tips mentioned above. Provided you can discharge you day to day spending quite comfortably, it doesn’t affect your current standard of living and still have spare income accumulating then you can start gifting these remaining funds down to your grandchildren. Plus, there’s a bonus there’s no 7 year clock ticking here. The secret is to get a regular pattern of gifting established, build up a good habit. A predictable pattern of gifting allows your grandchildren to budget effectively and reassures you that you are providing practical support month in month out.
You might be happy to gift money directly to your grandchildren but what if there are minors or you want to be careful about giving them too much too soon? It can be very sensible to hold off giving money directly to grandchildren and caution is exercised for a variety of reasons. If you want to put something aside for their benefit but make sure a guiding hand is available you can settle money into a trust. This can either be to help out with those expensive school fees or memorable trips, pay money out at a certain age or to fund a worthwhile stage in life such as a university placement or funding the purchase of a property. You will need to think about how the trust should be set up, what type of trust is best and who should run it but with good advice and sensible investment there could still be funds available when your grandchildren have little ones of their own to look after.
If you would like further information please contact partner Julie Man on 01932 590643 head of our award winning Private Wealth team recently recognised as ‘Private Client Law Firm of the Year in England’ in the 8th Annual Global Law Experts Awards.