Gifting money to grandchildren: how your clients can plan wisely

When clients start thinking about providing financial support to their grandchildren, it often forms a key part of their succession and estate-planning strategy. In this article we look at the practical options and tax considerations for making lifetime gifts to grandchildren, with a particular focus on inheritance tax (IHT) and other reliefs.

1. The inheritance tax context

For many individuals, reducing their estate’s exposure to IHT is a primary motivation in making gifts during their lifetime. Lifetime gifting can be a highly effective way of reducing the value of a potential IHT liability.Here are the main exemptions that may apply when the donor is gifting to grandchildren:

• Use of the annual IHT exemption: gifts of up to £3,000 per tax year are exempt from IHT. If the full £3,000 allowance is not used in a given year, the unused portion can be carried forward for one year.

• Small gifts exemption: you can make gifts of up to £250 per recipient (for example for birthdays or Christmas) and these are exempt, provided you haven’t already used another allowance on the same recipient.

• Wedding gifts: for a grandchild the exemption is up to £2,500 (lower for other relationships).

• “Normal expenditure out of income”: if a donor makes regular gifts from their income (after tax) that are sustainable and do not affect their standard of living, those gifts may be immediately exempt from IHT.

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If a gift doesn’t fall under those exempt categories, it becomes a Potentially Exempt Transfer (PET), meaning there is no immediate IHT charge, but if the donor dies within 7 years the gift may fall back into the estate and attract IHT. If the donor survives 7 years, the gift becomes fully exempt.

2. Using trusts to benefit grandchildren

For many clients the simple transfer of cash or assets is fine; for others who wish to maintain an element of control (for example controlling when the grandchild benefits, or protecting assets until the child is older) trusts may be appropriate. Two commonly used trust structures are:

Bare trusts

A bare trust is straightforward: a donor gifts an asset into trust for the benefit of a specific child (grandchild). The child becomes absolutely entitled at age 18 (or earlier, depending on terms).From a tax perspective: the gift is treated like a direct gift. Income and capital gains on the trust are taxed on the beneficiary (the grandchild) so long as they have minimal other income then tax may be very low.For many grandchildren the simplicity and transparency of a bare trust make it attractive.

Discretionary trusts

If the donor wishes to delay the time at which beneficiaries receive assets (for instance to help with a first home, wedding or in later life), then a discretionary trust could be the right vehicle. Trustees have the discretion to decide when and how much to distribute.However, the tax consequences are more complex: the transfer into trust is a “chargeable lifetime transfer” (CLT) for IHT purposes. Up-front IHT of up to 20% may apply (depending on the donor’s available nil‐rate band). Once assets are in the trust, periodic IHT charges (every 10 years) and ‘exit’ charges (when assets leave the trust) may arise. Trustees themselves are liable to tax on income and gains, and beneficiaries will face tax on distributions. These arrangements require careful advice and administration.

3. Tax-efficient investment vehicles

Rather than simply gifting cash, many clients may prefer to contribute to tax-efficient investment vehicles on behalf of grandchildren. Whilst the IHT treatment of a gift remains the same (i.e., treated as a gift to the grandchild for IHT purposes), the investment vehicles may provide additional features (growth potential, parental/guardian oversight until adulthood etc).

Examples include junior ISAs, certain savings plans or investment wrappers designed for children. Whatever route is chosen, it’s important that the IHT and other tax implications (income tax, capital gains tax) are fully understood.

4. What to consider when advising clients

Every client’s situation is different, and the most suitable approach depends on several factors:

• The size of the client’s estate and the extent of their potential IHT liability.

• How much they wish to give and over what timescale.

• Whether the client wants the grandchild to have immediate access or be restricted until a specified age or life event.

• The level of control the donor wishes to retain or pass on via trustees.

• The grandparents’ position: their income requirements, other commitments and the sustainability of giving “out of income”.

• Family dynamics: it’s advisable that the grandparents have open discussions with the parents of the grandchildren so that expectations, timing and the purpose of the gifts are clear and documented.

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5. How SJC, Chartered Accountants can help

At SJC, Chartered Accountants we have broad experience supporting families with wealth-planning and IHT mitigation. We can work with clients to:

• review their estate and identify exposure to IHT;

• explore the most appropriate gifting strategies (direct gifts, trusts, investment vehicles);

• analyse the income and capital tax implications;

• implement solutions, including drafting trust documentation in collaboration with legal advisors;

• monitor and review the plan over time in line with changing family circumstances or tax legislation.

  
  

If you are advising a client or as an individual are considering making gifts to grandchildren, speak to us early. Proper planning at the right time can make a meaningful difference to outcomes.