Becoming a grandparent is a very exciting time. And it’s natural that many grandparents want to be involved with their grandchildren’s lives, both practically and financially.

But before giving, it’s important to consider how you can share your money in a way that helps your grandchildren as you intend, and is tax efficient.

1. Know your options

There are various options but the choice will depend on your individual circumstances, including:

• how much you can afford to give away
• how old your grandchildren are, and 
• how much control you’d like to keep over the money after you’ve given it away

Individual savings accounts (ISAs) are a tax-efficient way of saving for grandchildren. For the under-18s, Junior ISAs (JISAs) can be a good option as the money can’t be accessed until age 18. These must be opened by the child’s parent or guardian, and for the 2021/22 tax year the maximum amount that can be paid in is £9,000.

If your grandchildren are older, you could contribute to an ISA they’ve already set up. This could be a standard Cash or Stocks & Shares ISA, or a Lifetime ISA. Lifetime ISAs can be opened between the ages of 18 and 40, with the main aim of helping people save for their first property or for retirement. The contribution limit is only £4,000 a tax year. But the amount invested gets an additional 25% government bonus, up to a maximum of £1,000 each year.

The benefit of contributing to an ISA for your grandchildren is that they won’t pay tax on any interest, income or capital gains. Remember though that if money is invested in a Stocks & Shares ISA, its value can go down as well as up and the ISA account holder may get back less than was paid in. Also bear in mind that tax rules can always change in the future. Your grandchildren’s circumstances could have an impact on tax treatment.

If you’re happy with something longer term, you may be able to contribute to a pension for your grandchildren. The maximum that can be paid in each year is £3,600, which includes 20% tax relief.

2. Consider setting up a trust

If you’d like more control over when grandchilden can access any money you put aside for them, you might want to consider setting up a trust.

A trust means that the money is controlled by trustees, of which you can be one. That means the trustees have control over how and where money is invested and, depending on the type of trust you have, when your grandchildren will benefit, and how much they’ll receive. Remember  that the value of all investments can go down as well as up, and beneficiaries of a trust which includes investments may get back less than was paid in.

You can use different kinds of trust depending on what you’re aiming to achieve:

• A bare trust is where you name a beneficiary at the start, which can’t be changed at a later date. The beneficiary will be able to request access to any money saved in their name when they turn 18.
• A discretionary trust offers more flexibility than a bare trust, as it gives trustees complete discretion over when and how much they pay out to a beneficiary.

Trusts can be complicated, so think about speaking to a financial adviser before you set one up. There’s likely to be a cost for this.

3.Think about the tax implications

Giving away money you know you won’t need can help you reduce the potential inheritance tax bill on your estate. But, in some cases, you have to survive for seven years after you’ve given the money away for it not to be liable for inheritance tax.

With smaller gifts, though, there’s no seven-year requirement, so this may be a good place to start.

For example, you can make small gifts of £250 to as many people as you like, perhaps as additional birthday or Christmas gifts to all your grandchildren.

In total, you can gift up to £3,000 each year - known as your annual exemption. Between two grandparents that means you could give away up to £6,000 a year, which is a sizeable sum. And, if you haven’t made gifts before, you can use your annual exemption from the previous year as well. This takes the allowance up to £6,000 for one grandparent and up to £12,000 for two grandparents.

Also, don’t forget you can give a grandchild £2,500 as a wedding gift, and there’s no inheritance tax liability, even if you die within seven years.

Tax rules can always change in the future. Your circumstances and where you live in the UK could have an impact on tax treatment.

4. Take control of your legacy

No one really wants to think about what will happen when they’re no longer around. But one way to make sure you support those you want to help financially, such as grandchildren, is to set up a ‘succession’ plan.

Doing this and making sure it’s clearly set out in your will can make things quicker and easier for the people you care about at a difficult time. And it can minimise the risk of family disputes.

When making your will, don’t forget your pension. You can leave instructions to say who gets it through a pension nomination. Your nomination and your will together form your succession plan, and can help make sure that you pass on as much as you can to the people you want, such as your grandchildren.

If you’re unsure about the best way to pass on your wealth, professional advice can help you set up a succession plan that’s in line with your wishes and is tax efficient.

We can help

At abrdn, we offer a complete range of wealth management services. If you’re already one of our clients and want to find out more about how you can support your grandchildren financially, speak to your financial planner. They’ll be happy to help.

Alternatively, you can book a free, no-obligation call with one of our financial planners to find out how we could help you.

The information in this article should not be regarded as financial advice. Information is based on our understanding in October 2021.