A helping hand for grandchildren

By December 15, 2022Financial Planning
Grandparents making festive cookies with grandchildren - A helping hand for grandchildren

As we head into the festive season, the focus of many at this busy time of year will be on buying gifts for loved ones. It may also be a good time for grandparents to think about the benefits of making gifts to help set grandchildren up for adult life, and help with future expenses they may face, such as education and university costs, or funds towards a deposit on their first home.

Gifts made to grandchildren under the age of 18 will need to be held in Trust for them, and perhaps the simplest form of Trust arrangement, a Bare Trust, is ideal for this purpose. The Trust is a separate legal entity, and Trustees will need to be appointed to administer the money. The Trustees could be the donor of the gift, the child’s parents, or other responsible individuals.

The Bare Trust continues until the beneficiary reaches 18, although it is important to note that at this point the beneficiary has the right to request that the assets are transferred to them. Some parents and grandparents may see this as less than ideal, as 18 is quite a young age to receive a substantial capital sum. That being said, if the purpose of the gift is to help pay for further educational expenses, funds will be handed over at the time that they are needed.

In addition, Bare Trusts can allow Trustees to advance funds to a child earlier than age 18, however funds must be used for the child’s benefit, such as education costs.


Bare Trusts can be tax-efficient

Bare Trusts can often be a tax-efficient way of gifting funds to the next generation, as income or capital gains arising on assets held in the Trust are taxable on the beneficiary, i.e., the grandchild. As they are unlikely to have any other taxable income at that age, if the amount of Trust income generated is below the child’s personal allowance (which is £12,570 in the current Tax Year) then no income tax will be due. Similarly, capital gains on investments realised are also taxable on the minor beneficiary, and therefore if the gains fall within the Capital Gains Tax (CGT) allowance, there will be no CGT to pay.

It is important to note that these exemptions do not apply when a parent makes a gift for their minor child, as the parental settlement rules may mean income remains taxable upon the parent.


Gifting to reduce an Inheritance Tax liability

Gifts into a Bare Trust are treated in the same way as any other gift and are therefore subject to the same tax rules as any other transfer by way of gift. Each individual has an annual gift allowance of £3,000 and if the allowance from the previous Tax Year has not been used, then this can be carried forward. A couple could therefore potentially make a total gift of £12,000 without any immediate Inheritance Tax (IHT) considerations. Any amount above this would be a Potentially Exempt Transfer and the donor of the gift would need to survive seven years from the date of the gift for this to fully escape their Estate for IHT purposes.

Making use of the annual gift exemption, or making larger gifts, can be a useful method of reducing a potential IHT liability, although the decisions around IHT planning in general are often more complex and require careful consideration. Holistic financial planning can help those in later life consider their potential IHT liability and look at a range of options that can reduce the amount of tax that would be payable by their Estate.


Deciding on an investment strategy

Whilst it is possible for money to remain as cash within a Bare Trust, for example held in a deposit account, most Trustees will opt to look to some form of other investment, such as Equities (Company Shares), Bonds and other assets, such as Property or Infrastructure, to try and achieve better returns than those that can be generated from deposit accounts. Trustees need to make sensible decisions in respect of how funds are invested, and as the responsibility rests with the them, many Trustees opt to receive independent investment advice to devise an appropriate investment strategy.

In addition to the initial investment decisions, Trustees have a duty to review the investments to ensure that they remain suitable. Other than reviewing investment performance, Trustees need to consider whether an investment strategy should be altered as a child moves closer to age 18, in particular if funds will be used at this time.


Bare Trusts need to be registered

A further responsibility that Trustees need to undertake is to register the Trust with the Trust Registration Service. This service is managed by H M Revenue and Customs and is the government’s way of keeping a record of Trusts in the UK.

The Service records the beneficial ownership of assets held in trust, together with the Trustees’ details. When first established, only Trusts that suffer tax on a regular basis had to register, but now Bare Trusts fall within the category of Trust that need to comply with the registration process.

Trustees can register using the Government online portal, and Trustees do need to be aware that they must register a Trust within 90 days of the Trust being established. Failure to register can lead to financial penalties, and whilst HMRC are likely to take a more lenient approach initially, persistent offenders are likely to face fines.

FAS can provide holistic and independent advice to grandparents looking to set up a Trust, including the most appropriate Trust to consider, together with advice on a suitable investment strategy. Speak to one of our experienced advisers for further details here.