Rachael Griffin: Tax tips for the Bank of Gran and Grandad

Grandparents recognising the younger generation’s need for financial help will find some gifting options more appropriate than others

Lending from the Bank of Gran and Grandad has surged in recent years, with recent research from Saga suggesting more than £37bn has passed between grandparents and their grandchildren.

Part of this is down to the fact older people are worried the younger generation is – in a somewhat surprising turn of affairs – going to be worse off than they are.

Indeed, further research from the Resolution Foundation has found there is a widespread pessimism about young people’s lives compared to those of the generations before them.

The main qualms of younger generations involve being unable to afford their first home or save for their retirement. Generous grandparents looking to gift some of their wealth on to help with such issues will find some methods better than others.

Tax-exempt gifts

In certain scenarios, grandparents can give money without causing a tax event. These include a £3,000 annual inheritance tax gift exemption. Clients can carry any unused annual exemption forward to the next year, but only for one year.

They are also allowed to give £2,500 to their grandchild as a wedding or a civil ceremony gift.

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There is also an IHT exemption for small gifts, which means grandparents can give as many gifts up to £250 per person as they want during the tax year, but only as long as they have not used another exemption on the same person.

If the grandchild is a minor and the grandparent wants to contribute to their pension, they can deposit up to £3,600 per year. This option means they can rest assured the grandchild will use the money for their later life as they will not be able to access it until pension rules allow them to do so.

Trusts

There are also two types of trusts to be considered as an option for bestowing money on the later generations.

A discretionary trust allows flexibility as to when the grandchild benefits from a gift but means grandparents can have more control by providing the trustees with a letter of wishes, setting out their requests on when and how assets are distributed. While the letter of wishes is not binding, it does provide the trustees with an insight into the settlor’s preferences.

This type of trust also allows for further grandchildren to be catered for both born during the lifetime of the grandparents or after and, crucially, gives the discretion over who benefits to the trustees. So, if a grandchild becomes wayward or perhaps is not deemed mature enough to inherit wealth at age 18, for example, this can be deferred to a later date.

There are also bare trusts, which mean the grandchildren would be completely entitled to whatever is in the trust at age 18. Unlike the discretionary trust, the 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 necessarily the remaining grandchildren.

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For the benefit of the flexibility that a discretionary trust affords, this type of vehicle will be subject to the IHT chargeable lifetime regime. This generally means that gifts made into such a trust will be regarded as chargeable lifetime transfers and potentially liable to an immediate IHT charge at the lifetime rate of 20 per cent.

A bare trust for IHT purposes, on the other hand, is treated as a potentially exempt transfer (in the same way as if the gift was made directly to the beneficiaries). This means that if the person making the gift lives for seven years after making it, the gift falls outside their estate for IHT purposes.

Implied trusts

Some grandparents unknowingly use an implied trust. This occurs when they give money to their children for their grandchildren.

An implied trust does not have a deed and is simply created by the series of events of the parties involved. In this scenario, the grandparents place the money in the care of their own children and give instructions that said money is for the grandchildren, thus placing the parents as trustees.

In terms of taxation, this would still fall on the grandchildren as they are benefits of the trust.

Rachael Griffin is tax and financial planning expert at Old Mutual Wealth

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