I became a grandmother for the first time last week. I want to provide a stable financial future for my grandson. But I know there are things like Inheritance Tax to be aware of. I would appreciate your help with this. What is the best way for me to gift money to my grandson?
Congratulations on joining the grandparents club! What an exciting time! It’s great you’re already thinking about how to help them now and into the future.
Let’s first take a look at some of the taxes you need to be aware of before you start making gifts to your grandson.
To start with, we’ll take a look at Inheritance Tax (IHT).
The key thing to keep in mind is how much tax applies if you’re looking to gift more than £325k in total. This is the IHT threshold.
The £325k includes all your assets (home, money, jewellery, car, the money you gift your family). If anything were to happen to you, your family may need to pay IHT on any asset or assets you’ve given them above £325k.
So, what steps can you take to gift for your grandson and make sure your family isn’t left with a hefty tax bill?
First off, you can gift up to £3,000 each tax year (April to April) to your grandson and it won't be subject to IHT should you pass away. If you choose to gift more than £3k, in any given tax year, you need to be aware that some of it could be taxed under IHT rules. That is if your total assets are valued over £325k and you pass away within 7 years of the gift being given.
If you live for more than 7 years after giving a gift of over £3k, then whoever you gave the gift to won’t have to pay IHT on the gift. Here’s a handy guide on the IHT rules that apply to gifting which provides a deeper dive on all the ins and outs of IHT exemptions, known as PETS.
You can also gift out of your regular income, provided it does not impact your standard of living – known as surplus income. You'll want to keep a good record of your outgoing expenditures. This is because keeping a good record will show that it is a regular gift. Your family will thank you for keeping up-to-date records. They'll need them when they're asked to show evidence of your past expenditures.
Okey dokey. Now we’ve gotten the tax housekeeping cleared up, let’s focus on what options you have for gifting to your grandson.
So how can your grandson actually receive the money you’re gifting him? There are some great options available depending on what you’re looking for.
The first is a Junior ISA (which stands for Junior Individual Savings Account). You could speak with your children about creating a Junior ISA in your grandson’s name as these can only be opened by the parents or legal guardian. But once it is opened you’ll be able to contribute up to £9k each year.
There are some benefits of a Junior ISA. The first is that any money saved and / or invested is tax free. This means as the money grows, no income tax or capital gains tax needs to be paid. The second reason is that the money can’t be accessed by anyone else other than your grandson. He will be able to access the Junior ISA when he turns 18. The drawback here, is whether at 18 he will use the money wisely, but hopeful he’ll have took on board the wise money tips his grandma will give him.