Should all grandchildren be treated the same?
Four friends were discussing grandchildren over lunch. All recognised the differences between their beloved grandchildren; some varied in age considerably, some of their children had one child, another had several, some were at university, and their siblings were not etc. Yet the discussion was around how to treat them all equally. A common thought amongst clients too.
In mulling this over, I came across this rather good summary of the issues from a US attorney.
Options – not financial advice
When it comes to making cash or other gifts, we all know the IHT rules to explain to clients – annual exemptions, normal expenditure out of income, NRB and PETs. But what about how to invest what is given?
For smaller cash gifts, how about opening a child’s bank account and paying money into that? As long as it is a cash account, albeit opened by a parent, it will not be a trust which requires registration on the TRS, and anyone can add money to it. The grandchild will be able to access it, but at least it could be a good way of teaching them how to manage their money. Most High Street banks offer this service.
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Whilst grandparents cannot open a junior ISA (that must be done by a parent or guardian), nevertheless, grandparents (or anyone else) can pay into these accounts. Junior ISAs are for UK resident children who are not eligible for a Child Trust Fund (which applied if they were born on or after September 2002 or before January 3rd 2011). The annual limit for investment in a Junior ISA is £9,000 (2022/23). Like other ISAs the child and the donor or parent do not have to pay tax on the interest they earn. Also, no need to register it on the TRS as it is not a trust. The funds cannot be withdrawn until the child reaches 18, but at 18, there will be a nest egg to help with the next stage in life.
Normal expenditure out of income
One of the friends identified the cost of one grandchild attending University, which is enormous with the cost of student fees, accommodation, the weekly shop, overdrafts, studying expenditure and having some fun! Whilst the student may get a student loan to meet some of these costs and find a part-time job as well, somewhere along the line clients will often want to help.
If they have surplus income for their needs, it is worth considering making a commitment to give the student a monthly stipend as part of normal expenditure out of income – a much-underused exemption from IHT without any actual limit apart from the donor being able to show that the payments were made out of surplus income in any one tax year and taking one year with another they did not diminish the donor’s standard of living – s.21 IHTA 1984 and https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231
Older children will doubtless welcome a grandparent’s help with purchasing their first home. I know I was grateful for both sets of grandparents giving modest gifts to me, which I eventually put towards the purchase of my first house.
The bank of Mum and Dad extends to the Family Bank these days, and there are many options short of an outright gift which could be made. The key is to ensure the parties are clear whether what is given is either a gift, a loan or an investment (i.e. taking a share in the equity). Depending on the route chosen, please encourage the parties to take separate advice and correctly document what is done. For more on this, see our webinar – The Bank of Mum & Dad Funding Property.
Using a trust
Making any gift into trust (apart from into a DPI) during lifetime is a chargeable transfer, but each grandparent can make a gift of their available NRB without incurring IHT. A discretionary trust will give the grandparents the best flexibility to help all their grandchildren and provide control over the fund, although the income tax is at higher rates and the IHT treatment is more complex.
However, advice from an IFA may help to reduce these complications by suggesting investment in an offshore bond as the bond does not generate income, so there is no income tax until encashment, which can be done by transferring bond segments to the grandchild before realization so that the chargeable event gains will be assessed on the grandchild at their rate of tax, rather than the settlor or trustees.
It is worth considering the options, simple and more complex, before rushing to a discretionary trust, which we all know can be costly in tax terms to administer, although providing all the flexibility a grandparent may seek to treat all their grandchildren fairly if not equally. It needs to be said to clients that achieving equality is something of a dream rather than a reality. Is equality the answer? Helping a grandchild achieve their potential is different for each one and will require different resources and support.
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