As a grandparent, you’re no doubt keen to spoil your grandchildren. You’ll slip them a bag of sweets, buy them an ice cream or give them the latest ‘must-have’ item on their birthday or Christmas list.
But what can you do to support them financially in the long term? And what measures are available that will also benefit you?
We look at five key ways to give the gift of financial independence while mitigating your tax bill.
1. Inheritance tax exemptions
You can pass some of your wealth to your grandchildren by making gifts. Currently, you can give a total of £3000 each tax year (known as your annual exemption), without it being added to the value of your estate. This can be to one individual or split among several. And if you don’t spend all of your allowance in one tax year, it can be carried over to the next.
But it’s important to be aware of the inheritance tax rules to avoid a tax charge. Once your annual exemption is used up, you need to consider the seven-year rule which means any gift you’ve given within seven years of your death would be subject to inheritance tax at 40% (although on a taper relief scale after three years).
You can also give unlimited gifts of £250 per year under the small gift allowance, provided you haven’t used your annual exemption on the same person.
And if there’s a wedding coming up in the family, as a grandparent, you can give up to £2,500 to the bride or groom tax-free. You can combine this with your annual exemption but not the small gift allowance.
The other allowance that’s often overlooked is ‘gifts from income’. This enables you to make regular tax-free payments to another individual to help with living costs, such as rent, provided the money comes from your regular monthly income, not your savings, and doesn’t affect your lifestyle.
2. Cash savings
You may have decided to help your grandchild by starting a savings account in their name to help them buy their first car or home.
There’s usually no tax to pay on children’s accounts, although if a child gets more than £100 in interest from money given by a parent, HMRC would need to be told. This is because the interest would count towards the parent’s Personal Savings Allowance (PSA), (£1000 in the 2024/25 tax year for a basic-rate taxpayer). Any interest above their PSA would be liable for the marginal rate of Income Tax.
The good news is that the £100 limit doesn’t apply to money given by grandparents, relatives or friends. And although the threshold isn’t relevant here, it underlines the value of tax-free wrappers, which we’re about to come onto.
3. Junior ISA allowances
It’s worth encouraging your grandchild to make full use of their Junior ISA allowance (JISA) as it’s a tax-efficient way of saving and investing for the long term.
In the 2024/25 tax year, an individual can put up to £9000 in a JISA and it’s tax-free.
Your grandchild can either have a Cash JISA and Stocks and Share JISA or a combination of both. Anyone can pay into a JISA (including grandparents!) but they can only be opened by a parent or guardian.
Once they’re 16, your grandchild can manage their own savings and on reaching 18 they can access the funds.
4. Lifetime ISA for adult grandchildren
Times have been tough for young adults trying to find their way, especially with the cost of living crisis, so you may be keen to help your adult grandchildren get on the property ladder.
One way to do this, if they’re between 18 and 39, is to encourage them to open a Lifetime ISA (LISA) and give them money to pay into it. These accounts are designed for young adults looking to buy their first home or make a start on their retirement savings and they offer the same tax advantage as other ISAs.
Your grandchild can put up to £4000 a year into a cash LISA or a Stocks and Shares LISA. Or they can choose a combination of both. They just need to make their first payment before they’re 40 but can keep contributing until they’re 50. The LISA limit of £4000 a year does count as part of their annual ISA limit, currently £20,000.
This type of account makes a tax-efficient option as the government offers a 25% bonus (up to a maximum of £1000) on top of any LISA contributions. So, if your grandchild can put in the full £4000 in any tax year, this is topped up to £5000. They’re essentially getting an extra £1000 for free. And your gift will go even further.
It’s worth pointing out that if your grandchild withdraws the money before they’re 60 for any reason other than buying their first home, they will face a 25% withdrawal charge.
5. Tax relief on third-party pension contributions
Taking their pension may seem a long way off for your grandchildren, but the earlier they start to build their pot, the greater the growth can be. And as a grandparent, you can make contributions to a Junior Personal Pension (Junior PPP) for them at any age – right from the day they’re born.
Like the JISA, a Junior PPP needs to be opened and managed by a parent or legal guardian until the child is 18 but anyone can pay into one on their behalf. Your grandchild will be able to access the money you’ve added to their Junior PPP once they’re 55 (57 in 2028).
You’re also enabling them to benefit from tax relief, valid on third-party contributions. The Junior PPP allowance is £3600 for the 2024/25 tax year, so you can pay £2800 in and the government will top it up by 20% or £720, making a total contribution of £3600.
Taking action
Being aware of the allowances available and making the most of them will help you stay tax-efficient while at the same time providing your grandchildren with financial security.
Please contact us if you’d like any more recommendations on how to use your finances effectively so you can lend a helping hand.
