“The world needs grandparents as those grandkids aren’t going to spoil themselves!”
Grandparents love to do everything they can for their grandkids, and often this will involve monetary assistance, whether this is funding private school fees, or putting money aside for their future. In addition, with the high costs of childcare, it is becoming increasingly common for grandparents to assist with childcare for working parents.
Here are 5 tax efficient tips grandparents should be aware of!
1. School fee planning
Grandparents may wish to assist with the costs of private school education for their grandchildren. This is often funded from income, which will have been taxed on receipt at the grandparent’s marginal rate, which could be up to 45%.
However, if the grandparent no longer requires the income producing asset, whether it be shares in the family company or an investment portfolio, it may be possible to use a trust in order to fund the school fees in a more efficient way.
This would allow for utilisation of the grandchild’s personal allowance and basic rate band, reducing the tax payable on the income, potentially to nil.
If set up correctly, this can also have a number of other benefits, including retention of control over the asset (especially useful in the case of shares in the family company), reducing your estate for IHT purposes and protection of assets for your family members.
2. State pension entitlement if caring for grandchildren
The amount of "qualifying years" required in order to receive the maximum state pension has recently increased from 30 to 35. Where a parent is registered for child benefit, they automatically receive a qualifying year where the child is under 12. If the parents are working and receive a qualifying year from their national insurance deductions, and a grandparent or other family member is assisting with childcare it is possible for the child benefit credit to be transferred to the grandparent (provided they are under state pension age).
This means that if a grandparent has taken early retirement in order to look after their grandchildren, this does not have to affect their entitlement to the full state pension. A joint application will need to be made to transfer the state pension credit after the October following the relevant tax year.
3. Inheritance tax exemptions for gifts
Grandparents love to spoil their grandkids! It is important to be aware that gifts will not fall out of your estate for inheritance tax purposes for 7 years after the date of gift. However, there are various exemptions available.
A gift can be made of up to £250 per child per year which will be exempt under the small gifts exemption. In addition, larger gifts may be covered by the £3,000 annual exemption per grandparent. There is also an exemption for wedding gifts – for grandparents this is up to £2,500 per grandparent.
4. Gifts out of excess income
A very useful but often overlooked inheritance tax exemption relates to gifts out of excess income. This applies to regular gifts of excess income, which can be made either directly or into a trust.
To be able to claim the exemption requires detailed records to be kept as these will need to be entered on the inheritance tax forms. However, once the initial review has been done this can be kept up to date fairly easily. Should you have a large amount of excess income it is certainly worth seeking advice as the savings available using this exemption can be substantial.
5. Have you reviewed your Will recently?
It is recommended that you review your will at least every 5 years, not only to ensure that it still meets your wishes, but also to ensure that it is drafted to be as tax efficient as possible. For example, it is worth checking that the terms of your will do not prevent the newly implemented main residence nil rate band from being available against the value of the family home.
In addition, it is always worth considering the circumstances of the potential recipients of your estate when reviewing or drafting your will. It may be worth considering placing assets into a trust or passing directly to grandchildren if you children will not require them. This will not affect the inheritance tax on your estate but may help prevent a further 40% deduction before they are ultimately passed to your grandchildren.
To find out more about how we can help you implement any of the above, or for a full inheritance tax review, call us on 0808 144 5575 or
