Grandparents are often key in providing financial support to their grandchildren, especially when you see the staggering levels of debts many kids start adult life with today thanks to education loans.
How you give money will largely depend on the life-stage of your grandchild. Read on for tips on giving money to...
The best way to give cash to a child is to contribute to a Junior Individual Savings Account (Jisa). These are accounts, in either cash or stocks and shares, for children under the age of 18 that allow up to £9,000 a year (2021-22 allowance) to be set aside for a child in a tax-efficient way.
They are available from a wide range of providers including banks, building societies and asset managers – companies that manage stocks and shares.
Although a parent or legal guardian must open a Junior ISA, once open anyone can pay in. Here a bit of wisdom and experience from members of the older generation can also be valuable in helping to choose the investments, as well as hard cash contributions.
HM Revenue & Customs data show that about 70% of Junior ISAs have gone into cash. Even though stock market returns may fluctuate and even go down in the short term, cash returns are invariably much poorer in the long term, particularly in the current environment when interest rates are so low.
However although the general consensus is that shares will offer a better return over the medium to long term, of five years or more, how the child’s parents want to invest is a matter of personal preference.
Opening a stocks and shares account could not however be easier, so wondering how you do it should not be an obstacle. There’s more information on the Gov.UK website.
What about Child Trust Funds?
If you were wondering what happened to Child Trust Funds (CTFs) - a type of account similar to a Junior ISA - these are no longer available. CTFs, could be opened for children born between 1 September 2002 and 2 January 2011 but they have now been discontinued and no new accounts can be started. However, those children who already have CTFs will retain them until they reach 18, and contributions can still be added to them.
The CTF and Jisa rules have been aligned and CTFs have the same contribution limits as Junior ISAs. The good news is that parents can switch existing CTFs into a Jisa if they believe this will give them a better return – and Jisas often do as they offer a wider range of investment choices.
If your grandchildren have CTFs you could investigate if they might be better off with a Jisa and nudge their parents to make the switch.
There’s more information on Junior ISAs and how to switch from a Child Trust Fund on the Money Advice Service website.
Once the Junior ISA is maxed out, or if you have smaller sums to invest, grandparents could consider National Savings and Investment products, such as Children’s Bonds and Premium Bonds, Grandparents can buy these themselves for grandchildren or great-grandchildren under 16, and they can be held in the buyer’s name until the child’s 16th birthday.
The young child
You are unlikely to be able to open a bank or building society savings account for a child unless you are the child’s legal guardian. But grandparents can pay into a savings account once a parent has opened it.
When giving larger sums of money to a child, grandparents and friends should try to make sure it goes straight into the child’s account rather than being paid over to a parent. Alternatively, you should provide documentation of the gift. This is because, if a financial gift derives from a child’s own parent and the interest comes to more than £100 a year, tax is charged as if the money belonged to the parent. You should therefore always make sure the taxman can see where the money has come from.
The pension saver
It may seem odd, but a child can have a pension plan from birth – and contributions from grandparents could lay the foundation for making the child a pension millionaire before they even leave school.
Pension saving for a child is probably your least urgent priority as there are bound to be more urgent demands on your cash, such as holidays, education fees, buying a car or a deposit for a home, but if you have done all that, pension saving for a child is amazingly tax efficient.
Pension contributions are normally pegged to earnings because of the tax relief they attract. The rules state, however, that anyone – even a child – can contribute money into a pension even if they have no earnings at all. Even better, contributions still attract tax relief.
Your contributions until the child turns 18 could ensure they had a reasonable pension by the time they retired even if they never paid a penny themselves during their working life. If they saved for retirement themselves as well they could end up stinking rich!
Helping with school fees is an ideal way for grandparents to help out, and can even reduce inheritance tax if you use the “regular gifts out of income” exemption. Even if you don’t live for seven years after making the fee payments, as long as there is a commitment to pay fees on a regular basis the gifts will be IHT-free.
Grandparents can also help with pocket money or picking up a regular expense, such as a mobile phone contract. But do be careful what you are signing up for. If the child decides to stream a television show on their smartphone during a foreign holiday, and runs up a bill for £1,000, it will be down to you to pay it as the account will be in your name.
Read more about tax and gifting money to your children
Many grandparents want to help out with their grandchildren’s student loan repayments, but you should be careful that you aren’t throwing money away. Student debt repayments are “income contingent” and work more like a tax on earnings than – say – the repayment of a mortgage, where overpayments can reduce the monthly bill. Moreover, if the student never earns enough for the debt to be paid in full, the remainder owing is written off after a certain period.
There’s plenty of information on the Gov.uk about how student loan repayments work. In short, unless you are sure that your grandchild will have earnings during their working lifetime that will repay their loan in full, you could be wasting your money by repaying debt that would otherwise have been written off.
For students who are unlikely to be among the highest potential earners, the best way to help them could be to contribute towards the cost of accommodation, or by paying down credit card debt or a bank overdraft instead.
The home buyer
Helping with rent and house purchases are top of the list. Parents and grandparents have traditionally downsized to release money to help family members get on the property ladder, and save inheritance tax too by reducing their assets before they die.
The inheritance tax rules have changed over the last few years, with homes worth up to £1 million out of the IHT net so the older generation may be less incentivised to move. However, where grandparents are moving to a smaller home anyway, handing surplus cash over to the younger generation can still make sense.
What about Help To Buy ISAs?
A scheme to help young people to buy their first home is the Help to Buy ISA, which was launched in December 2015 and was available until 2019. You can no longer open a HTB ISA but if your grandchild already has one they can continue paying into it until November 2029 and the bonus can be claimed until November 2030.
You can make monthly savings of up to £200 a month. The Government then tops up the account by an extra 25% of the amount saved, the equivalent of receiving basic rate tax relief on your savings, up to maximum of £3,000 per person, The minimum amount you need to save to qualify for a bonus is £1,600 (which gives you a £400 bonus).
The bonus is available on home purchases of up to £450,000 in London and up to £250,000 outside London and will be handed over when the young person buys their first home. The bonus is paid straight to the mortgage lender, it earns no interest, and you only get it if you buy a home.
The limit on HTB ISAs is much lower than for an ordinary ISA and the money must be spent on a home within a certain price band, so it is not very flexible. However, the bonus rate is highly advantageous.
Find out more about signing property over to your children
Grandparents who want to help young adults financially without actually handing over cash may be able to act as a guarantor for a grandchild’s home loan. There are several ways of doing this, usually by depositing cash in a savings account with the mortgage lender, or putting up their own home as security for the grandchild’s loan.
A guarantor loan could be particularly suitable where the home buyer can “afford” higher mortgage payments, perhaps from bonus or commission payments, but the lender will take account only of basic salary when calculating the size of the loan it is prepared to advance.
The advantage of guaranteeing a loan is that no money changes hands to set the arrangement up. The downside is that, if the grandchild defaults on payments, the lender can recover the money by seizing the savings account, or even forcing a sale of the grandparents’ house
Grandparents can also participate in so-called “offset” arrangements. The grandparent places cash in a savings account with the mortgage lender, and interest on the savings account, instead of going to the grandparent, is deducted from the sum the grandchild needs to pay for the home loan. Because the grandparent receives no interest, as it is diverted to the mortgage, there is no income tax to pay, making the arrangement highly tax-efficient.
Grandparents and great grandparents can each give cash or gifts worth £2,500 on the occasion of a wedding, and anyone else can give £1,000.
The overseas resident
If a grandchild lives overseas permanently, consider how the child will eventually access the cash. It could be better to send money to the parents and lodge it in an overseas account that they set up for the child.
If you must save in the UK, you will meet the same obstruction to opening an account for a child living abroad as you do for one living in the UK – in fact probably more so. Even a parent who lives abroad may not succeed in opening a UK account for their child unless they have a permanent UK address, because of money-laundering rules. For small sums, National Savings products that allow investments for overseas residents may be your only option.
Don’t open accounts without telling parents and guardians what you have done. Accounts that are tax-free in the UK may attract tax in other financial jurisdictions – including many US states – or you may inadvertently cause parents to breach account investment limits. A “secret” account could actually put the child or his parents in breach of the law.
Read our guide to saving for grandchildren abroad
How much money can I give my grandchildren?
You can give away £3,000 in any one year completely free of inheritance tax. In the first year, or if you miss a year, you can give away £6,000 because you can use the previous year’s allowance if you didn’t use it at the time – but only for one year.
You can make small gifts of up to £250 to as many people as you like – scores if you want – but you mustn’t give any individual more than one of these gifts amounting to more than £250 or combine the £250 with another allowance (for instance, giving someone your £3,000 annual allowance plus a £250 small gift) as this is not permitted.
You can also give regular gifts out of income. If you are still working, or have regular pension or saving income, which it seems you do, and you are giving your daughter a payment every month and have done this for some time, then there would be no doubt that you fulfil this criterion.
There is no capital transfer tax (CTT) in the UK – a tax on simply handing money from one individual to another, where no goods or services are involved, at the time you make the payment.
If your assets will amount to more than the nil rate band when you die then as long as you live seven years after making the gift, the money that you are giving your daughter – known in the jargon as a “potentially exempt transfer” – drops out of your estate and there is no tax to pay.
If you were tragically to die within seven years of making the gift, then you still might not have to pay inheritance tax on your daughter’s money, because you could make use of various annual allowances.
What counts as a regular cash gift?
The rules say that the payments must be regular rather than sporadic – although they don’t necessarily have to be monthly – and that the payments must not be from capital – i.e. savings – or cause a deterioration in your standard of living.
Anyone contemplating using this allowance is advised to keep detailed records such as bank statements in case of queries by the taxman at a later date.
Keep control of your finances, save money and avoid getting ripped off with Saga's extensive range of money articles.