Successful UK grandparents are doing more to help their grandchildren with money. Here are the various forms of grandparent money shared to the younger family members:
The good news for gifts to grandchildren is that £3,000 can be given away annually without being charged inheritance tax. Weddings and other special events also allow for family gifts that are outside of the purview of HM Revenue & Customs (HMRC). The bad news is that amounts higher than that might be taxed.
Many grandparents have gained valuable experience due to managing valuable stock, bond and property portfolios. Minors (under the age of 18) cannot directly own these financial assets. Grandparents can open “custodial accounts” for their grandchildren to help them learn valuable money management skills at an early age.
The basic personal interest that grandchildren can gain without being taxed is £100 as detailed on HMRC Tax Form R85. Usually, your bank or building society will issue this form at tax time.
More wealthy grandparents are turning to trusts to minimise the high inheritance (death) tax. Perpetual, revocable and irrevocable trusts allow for senior citizens to gradually distribute their wealth to grandchildren and other family members. Trusts can complement wills.
The UK has numerous types of special trusts, including the Child Trust Fund (CTF), Junior Individual Savings Accounts (JSAs) and Children’s Bonus Bonds (NS&I).
If the gifts given within seven years before a grandparent die amount to more than £325,000, then inheritance taxes might be assessed. HM Revenue and Customs has the authority to review gifts and asset transactions between grandparents and their grandchildren to determine if they were meant to avoid inheritance taxes. The inheritance tax is 40% for an estate above a certain amount.
If a grandparent is intestate and the parent dies before the grandparent, then the grandchild could inherit directly from the grandparent. Current accounts would be placed in a trust and distributed by UK probate courts. Creating “custodial accounts” with both the grandparents’ and grandchildren’s’ names on them makes asset transfer easier after death.