Written by Naomi Neville, Senior Associate Solicitor and Simon Mackie, Senior Associate Solicitor, from the Tax, Trust and Estates team

Grandparents are often seeking ways of providing financial assistance to their children to help their grandchildren have the best possible start in life. That might be by funding a grandchild’s school fees or by helping them to buy their first home. 

However, deciding on how best to provide this support is not always straightforward and, as a grandparent, you will have a number of concerns that you are anxious need addressing. 

What are the tax consequences? Can I afford to make these gifts now without jeopardising my own security? What if my grandchildren are financially immature or suffer a breakdown in their marriage? Can I control how the funds are used?

Arguably, one effect of the pandemic is that these concerns have been brought into sharper focus.

With a carefully considered and implemented strategy, these concerns can be addressed. You’ll need to take into account number of factors including your objectives and goals of the gifting, the affordability for you, your own life expectancy, and your grandchildren’s circumstances.

Smaller gifts now

You can make use of your annual £3,000 exempt amount to make gifts to your grandchildren without fear of inheritance tax consequences. These sums can be paid directly to a grandchild or can be used to pay for something they need.

If you want to make more regular gifts, for example to pay for nursery, school, or university fees, it might be possible for you to pay for this out of your net surplus income. Provided that certain conditions are met, payments out of your net surplus income should be exempt from inheritance tax, irrespective of the value given each year.

Saving for the grandchildren’s future

It can be very effective to invest into a pension for your grandchildren, if you want to take a more long-term approach. The maximum you can invest in one year is £2,880, and this will benefit from a 20% top up from the government. These gifts will be free of inheritance tax too if they are covered by your own exemptions. While your grandchildren will not be able to access the pension fund until they are in their mid-50s, the fund should by that time have grown into a substantial pot.

Supporting with larger gifts

Many grandparents wish to help with the purchase of their grandchild’s first home, and there are various ways you might seek to do this.  It’s possible to make an outright gift, to lend money directly, or to give the cash funds to a trust and the trust can then lend the money to your grandchild. Using a trust is particularly helpful if you have concerns about financial immature or vulnerable beneficiaries or potential claims on a future divorce. Careful consideration will need to be given to the right mechanism, especially if your grandchild also needs to borrow money commercially to fund the purchase.

Impact for you

When you’re considering any gifting of this nature, you should ensure that, as a general health check, your broader estate plan is in order. In particular, make sure you have suitable Wills in place which cater for your and your family’s individual circumstances, make use of the available tax allowances and contain provisions which offer greater wealth protection (e.g. to protect your assets and your beneficiaries). You should also check that you have Lasting Powers of Attorney in place to avoid a time consuming and expensive application to the Court of Protection in the event that you lose the capacity to deal with your own affairs.

Structuring the financial assistance for your grandchildren effectively can often reduce the inheritance tax liability on your death and afford greater wealth protection for your heirs. And, crucially, it helps to give them the good head-start you are seeking. However, it is vital to seek professional advice to ensure that it is done in the right way, that it meets your and the family’s needs and that it addresses the complexities and avoids the pitfalls.

Find out more from our expert Tax, Trust and Estates Team.