Financially empowering your grandchildren

How to give them a start in life to carve out their own path

There’s a certain nobility in the desire of grandparents to support their progeny and pass wealth down the generations. This process brings several options, each with unique advantages and drawbacks.

Boosting your grandchildren’s financial future
Do you want to financially empower your grandchildren, giving them a start in life to carve out their own path? Whether you’re considering a loan or a gift, the fulfilment derived from such generosity is profound. However, how should you best navigate this journey?

Lump sum or monthly allowance?
Should you provide a lump sum or establish a monthly allowance? When is the opportune time to make such decisions? These are significant queries that warrant careful consideration.

Understanding Inheritance Tax
The issue of Inheritance Tax is another crucial aspect that demands attention. The repercussions of your financial choices can have considerable implications. Therefore, it is essential to be well-versed and ready for these eventualities.

Distributing wealth from nest-eggs to first homes
Perhaps your thoughts revolve around sharing a nest-egg among your grandchildren or assisting a younger relative in securing their first property. Regardless of your intentions, let’s delve into some feasible alternatives.

Gifting money and reducing Inheritance Tax liabilities
Gifting money early on can diminish Inheritance Tax liabilities. As a grandparent, in the current 2023/24 tax year you can gift up to £3,000 annually without it adding to the value of your estate. Presently, a couple could gift £6,000 per year. If this amount, or part thereof, is invested in a pension, it would receive tax relief.

Facilitating home ownership the Lifetime ISA (LISA)
For grandparents keen on aiding a grandchild in saving for a home, they might contemplate saving into a Lifetime ISA (LISA). While only the child or grandchild (the account holder) can open and manage their LISA, it’s feasible for grandparents to gift money to them for depositing into their LISA.

Benefits of Lifetime ISAs
A LISA can be a beneficial saving tool for grandchildren aged between 18 to 40, especially if they’re striving to accumulate a deposit for a first home. The government augments subscriptions of up to £4,000 annually by 25% (i.e., £20 added for every £80 subscribed).

However, a 25% tax penalty applies to withdrawals made for any purpose other than purchasing a first home, unless the individual is terminally ill or aged 60 or above. Since the tax penalty exceeds the initial bonus, it is typically not the most tax-efficient investment if the penalty is likely to be incurred.

Contributing to a pension
It’s common for most individuals not to consider setting up a pension until they’re of working age. However, a Junior Self-Invested Personal Pension (JSIPP) can be initiated as soon as a child is born. What’s more, contributions from parents or grandparents, known as ‘third-party contributions’, can be made directly to the plan. These contributions are treated for tax relief as if the beneficiary made them.

Contributions paid into a ‘relief at source’ scheme currently enjoy tax relief of 20% (£20 for every £80 net contribution), provided the total contributions do not exceed the beneficiary’s relevant UK earnings for the tax year 2023/24, or £3,600 if higher.

Benefitting from higher income tax relief
Furthermore, if a beneficiary has been subjected to Income Tax at a higher rate, they can claim the difference directly from HM Revenue & Customs through self-assessment. This could result in an additional 20% for a higher rate (40%) taxpayer on some or all of the contributions.
Even though a child under the age of 18 is unlikely to have relevant UK earnings, annual contributions up to the ‘basic amount’ of £2,880 net (£3,600 gross) are still permissible and will benefit from tax relief.

Gifting through pensions is a very tax-efficient approach
Pension contributions present a very efficient method for gifting money to a child or grandchild due to their tax benefits. Nevertheless, it’s important to note that these funds will currently likely remain inaccessible until the recipient reaches 57 years of age (the normal minimum pension age is set to increase from 55 to 57 in April 2028).

Establishing trusts harnessing control over investments
For individuals seeking more control over how their money is used, setting up an appropriate trust is an option to consider. A wide variety of trusts are available, catering to individual requirements. This is a highly complex area of financial planning and wealth management and professional advice should always be obtained.

Parents and grandparents have a plethora of options when it comes to saving for a child or grandchild. Making the right selection can make a substantial difference.