21st June 2018
With Inheritance Tax receipts at all time highs, tax planning is more important than ever before, but where your children already have significant assets making gifts to them may simply be storing up a problem for the future. It is, however, often possible to make provision for grandchildren in a more tax efficient way.
If a parent transfers assets to a child under the age of 18, if the income produced by those assets is more than £100 per year, the income is taxable on the parent. This rule does not apply to gifts from grandparents, so giving assets directly to a minor grandchild can help utilise their tax free personal allowance, enabling their savings to increase without any tax charges. For greater protection, a trust structure may be used so that the grandchild can only access the assets upon reaching a certain age.
It is also possible for a grandchild to have a personal pension as soon as they are born. A parent or grandparent can then make a payment of up £2,880 each year into this pension, with tax relief topping up the contribution to £3,600. Each individual has an annual Inheritance Tax gift exemption of £3,000 per year, so this can be a very tax efficient way of providing for a grandchild's long term future.
In addition to the standard nil rate band a residential nil rate band, currently of £125,000, has been introduced. This additional allowance is only available where a home of the deceased is passed on death to a lineal descendant. In most cases, this will be a child, but the allowance is also available where the home passes directly to a grandchild.
With the younger generation finding it ever more difficult to get on the housing ladder, this can provide a valuable boost, whether the legacy takes the form of the property or the proceeds from its sale.