The importance of the bank of Mum and Dad for helping the next generation make a start in life, and particularly to get onto the housing ladder is well known.
But when Mum and Dad may be experiencing financial challenges of their own, many younger people are turning to an older establishment which may have even deeper reserves.
We look at the bank of Gran and Grandad, and how it can provide financial help without running into tax problems.
Business is booming for the Bank of Gran and Grandad
Lending, or more likely giving, from the Bank of Gran and Grandad has surged in recent years. Mum and Dad may be stretched, still paying off their own mortgage and saving hard for retirement, but Gran and Grandad may well be sitting on a reserve of cash and a home which has appreciated beyond their wildest dreams.
Many are generous. They see the challenges that young people face, which may be far greater than they faced themselves, particularly with getting their first home. According to a recent report by Lloyds Bank, British grandparents lavished £5.6 billion to their grandchildren last year alone, on top of £29.6 billion they gave their own children. Some of this probably helped a grandchild secure a first home.
But grandparents looking to gift some of their wealth need to find the best way to do so, or they could find that the real beneficiary of their generosity is the taxman.
Give to the grandchildren, not the taxman
It is a common misunderstanding that you can’t simply give money away. This is not true.
The problem with giving cash comes when it’s time to pay Inheritance Tax (IHT). You can gift £250 to as many people as you want every year, and also have a £3,000 annual exemption, (you can’t give both the £250 and £3,000 to the same person). If you didn’t use your exemption in the previous year, you can carry it forward, giving you £6,000. All of this is exempt from IHT.
If you want to gift larger sums, you can. These won’t be counted for IHT purposes either as long as you survive for seven years afterwards. If you don’t, the money you’ve given as gifts would use some of your nil rate band (£325,000) available to offset against your estate. This could lead to a 40% IHT charge.
So, if the bank of Gran and Grandad can stay in business for another seven years, giving a cash lump is not a problem. But there are other ways to be generous.
It’s never too soon to start saving for a pension. Thanks to the wonders of compound interest, the longer cash has to grow, the more rewarding pension saving can be. A child can have a pension plan from birth, and proud grandparents can contribute up to £3,600 per year. Contributions attract tax relief, meaning that the £3,600 contribution costs just £2,880.
Figures from Tilney Bestinvest show that an annual contribution of £2,880 for 18 years would cost total of £51,840, and at current tax rules would be grossed up to £64,800.
A trust can be another way to avoid your generosity benefitting the taxman is to set up a trust. You can set how and when the funds are paid, and reduce your estate for IHT at the same time.
Using a discretionary trust gives the greatest flexibility and control but the taxation is higher and more complex.
There are also Bare Trusts, where there is no need to make any choices or stipulations, and the grandchildren are entitled to whatever is in the trust at age 18. Unlike the discretionary trust, beneficiaries are fixed, so once the trust is declared it is not possible to add (or remove) beneficiaries. This means that, if a beneficiary dies, their estate will benefit from the trust, not the remaining grandchildren.
Ready to open a branch of the Bank of Gran and Grandad?
Wanting to be generous to the rising generation is only natural, but getting your money to those who really need it does demand a professional knowledge.
To get that knowledge working for you, and discuss the options, and to get some export advice if you wish to set up a trust, please contact us at Continuum.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.