Latecomers to Grandparenthood

[Dove21]

The Dove household was recently blessed with a grandchild. Event probably not to be repeated, at least not in our lifetime. We’re looking to make a meaningful provision for the child at 18, gifting a lump sum in the lower 6-figure range. Time is probably not on our side to consider annual tax free gifts, dripfeeding into JISAs etc, or substitution of parents’ expenses eg school fees etc.

Two options under consideration.

1) Cash transfer under PET by Mrs D, whose health prospects are probably better than mine over the next seven years. Funds held either in a Childrens’ BS account (no hope of matching inflation over 18 years) or a Bare Trust trading account with someone like AJ Bell. Neither Mrs D or D Junior much interested in portfolio management, so holdings would need to be on a ‘low intervention’ basis eg Linkers, ETF/Index and/or Lifestyle products.

2) Use of my SIPP of approx equivalent value naming grandchild as beneficiary. Previously unknown to me, but it turns out SIPP proceeds, once bequeathed, shed much of their inflexibility. A J Bell has a product called a ‘Junior Beneficiary Drawdown SIPP’, into which they will even accept in specie transfer from HL (need to check with the latter). This option is less IHT-friendly as it doesn’t remove capital from our taxable estate, but would seem to have offsetting advantages.

Supporting grandchildren is I know frequently and helpfully discussed hereabouts. We’d be grateful for any informed opinion on the above options specifically, or the more general challenge of balancing market risk with inflation-proofing over the next 18 years. Thanks in advance.

Dove

[monabri]

Annual ‘gift allowance' £3000

You can each gift £3k per tax year..so £6k this year ...£6k next. I believe that, if you didn't use your individual £3k allowances in the previous tax year ( 2022-23) you can both utilise that too. So, by April 2024 new tax year, you could 'offload' £18k. This removes £18k from any PET risk.


https://www.moneyhelper.org.uk/en/famil ... itance-tax

[helfordpirate]

The Dove household was recently blessed with a grandchild.

Congratulations!

Two options under consideration.
1) Cash transfer under PET

This was the option we took. Vanguard Lifestrategy 60 or 80 in a Bare Trust with AJ Bell. No rebalancing to do - just fire and forget. However, If you are looking at a 6-figure gift this might generate enough income that the grandchild has to do a tax return and pay tax.

2) Use of my SIPP of approx equivalent value naming grandchild as beneficiary.

This is a good option if you are sure your wife or immediate children don't need the SIPP. If you die before 75 it is basically tax free to your grandchild; if after then at their marginal rate. Obviously if you live a long time they have to wait!

A J Bell has a product called a ‘Junior Beneficiary Drawdown SIPP’,

They have a "Junior SIPP" - but you can only put £3,600 pa into it.

[DrFfybes]

Annual ‘gift allowance' £3000

You can each gift £3k per tax year..so £6k this year ...£6k next. I believe that, if you didn't use your individual £3k allowances in the previous tax year ( 2022-23) you can both utilise that too. So, by April 2024 new tax year, you could 'offload' £18k. This removes £18k from any PET risk.


https://www.moneyhelper.org.uk/en/famil ... itance-tax

They can do up to £12k this tax year with unused allowance from last year, but AIUI if they make a PET next year to the same person as they gift the £3k then the £3k is added to the PET. This is what we were told when sorting parents' affairs.

Paul

[gryffron]

On a moral point: The time in their life when most people are skint is 20s and 30s. University, buying first house, kids. A SIPP cannot be accessed until they are 57. Current rules, will probably go up. I’d be cursing you if I were desperately trying to save for these things knowing I had half a million in a pension I could not touch for 30 years Put a bit in a SIPP sure, but let them have access to the bulk of the cash when THEY need it. Even if that is less tax efficient to your estate.

On a tax practical point. PETs are taxed on a sliding discount scale up to 7 years. Don’t wait. Do it sooner to maximise PET benefits.

Gryff

[Wuffle]

Is it definitely the case that the inheritor of a SIPP, who has in no way contributed to it, is bound by the 'over 57' rule?
Having read one or two threads covering this I am unsure whether this applies only to the original, named contributor who received tax back for contributions. Certainly, tax would be due at the inheritors marginal tax rate on withdrawals, but are they bound by the age restriction?
Is keeping the inherited SIPP and their own pension arrangements separate a consideration?

W.

[pompeygazza]

Personally I would open up a Junior Isa for them, they'll have access to it at 18 then.

[Howard]

Personally I would open up a Junior Isa for them, they'll have access to it at 18 then.

I don't think this answers the OP's question.

Junior ISAs can only be opened by parents or legal guardians and you can't put six figure sums in them.

Grandparents can fund bare trusts with large amounts and these only allow access to the grandchild from age 18.

We have used the bare trust route for our grandchildren and have invested (slightly smaller amounts ) in funds/ITs which do not pay high dividends so the tax situation should not be too much of a problem when the age of 18 is reached. I have discussed tax and savings with them (but not the trusts!) since the age of around 10 and hopefully they will be able to manage tax returns if needed.

One must remember that the bare trust must be registered with HMRC, this is not an onerous process.

regards

Howard

[pochisoldi]

On a tax practical point. PETs are taxed on a sliding discount scale up to 7 years. Don’t wait. Do it sooner to maximise PET benefits.

IIRC a PET consumes the IHT allowance first (most recent transfers first), and then the sliding scale of IHT kicks in on any remaining bequest.

[scrumpyjack]

I did this for my grandchildren. Bare trust accounts with Hargreaves Lansdown, mostly invested in ITs and ETFs.
The dividends on the bare trusts are then paid as Junior ISAs subscriptions each year for each child.

No problems, apart from hoping they are sufficiently well brought up not to splurge it all on reaching 18!

[helfordpirate]

No problems, apart from hoping they are sufficiently well brought up not to splurge it all on reaching 18!

Some mitigation for this is to ensure the trustees have a power of advancement - this can either be express in the trust deed (if there is one), or (I think) there is a statutory provision if not specifically excluded. If the trustees have doubts they could apply the whole or part of the trust fund "for the education or maintenance of the beneficiary" before they are 18 - obviously has to be clearly to the benefit of the child! And might be hard to get rid of a 6 figure sum!

[scrumpyjack]

On a tax practical point. PETs are taxed on a sliding discount scale up to 7 years. Don’t wait. Do it sooner to maximise PET benefits.

IIRC a PET consumes the IHT allowance first (most recent transfers first), and then the sliding scale of IHT kicks in on any remaining bequest.

I think the PETs are allocated to the nil rate band in chronological order so it is the oldest, not the most recent, transfers that use up the nil rate band first? Designed that way so you get the minimum benefit from the 7 year rule!

[stevensfo]

No problems, apart from hoping they are sufficiently well brought up not to splurge it all on reaching 18!

Some mitigation for this is to ensure the trustees have a power of advancement - this can either be express in the trust deed (if there is one), or (I think) there is a statutory provision if not specifically excluded. If the trustees have doubts they could apply the whole or part of the trust fund "for the education or maintenance of the beneficiary" before they are 18 - obviously has to be clearly to the benefit of the child! And might be hard to get rid of a 6 figure sum!

I was going to make similar comments. Growing up, apart from a bit of help needed for living expenses, uni was completely free. I was careful with money and never received a big windfall, but if I had, I would have appreciated it most in my early thirties when I finally had a decently-paid job and the house-buying and starting a family business began.

We have two sons, one very much like me, the other terrible at budgeting and saving and still studying.

So, a large sum of money falling into their laps may be used wisely by one, but wasted by the other.

I don't have a clue how much power the trustees have in how much and when, but if at all possible, I would allocate some money to ensure they left uni without debts, then the rest perhaps when they had secured employment.

The thought of our kids or nephews, nieces receiving a huge sum at 18 is quite terrifying!

Steve

PS One little ruse I read about many years ago was to buy a birthday card for each year starting with the first, and tape a gold Britannia coin inside with appropriate words, then keep them all hidden in a shoebox somewhere. Of course, apart from the danger of having them stolen, there's also the question of legality, though when it comes to gifts within a family, I don't think it's anyone else's business.

[Lootman]

buy a birthday card for each year starting with the first, and tape a gold Britannia coin inside with appropriate words, then keep them all hidden in a shoebox somewhere. Of course, apart from the danger of having them stolen, there's also the question of legality, though when it comes to gifts within a family, I don't think it's anyone else's business.

Why would there be "question of legality" about making gifts (gold or not) to a grandchild? As far as I am aware gifts are not taxable, and do not even need to be reported whilst you are alive nor if your death occurs more than 7 years after the gift.

Loot (grandfather)

[stevensfo]

buy a birthday card for each year starting with the first, and tape a gold Britannia coin inside with appropriate words, then keep them all hidden in a shoebox somewhere. Of course, apart from the danger of having them stolen, there's also the question of legality, though when it comes to gifts within a family, I don't think it's anyone else's business.

Why would there be "question of legality" about making gifts (gold or not) to a grandchild? As far as I am aware gifts are not taxable, and do not even need to be reported whilst you are alive nor if your death occurs more than 7 years after the gift.

Loot (grandfather)

Sorry. My fault for not explaining very clearly. I think the idea was about somebody doing this retrospectively. i.e. you think you may not last another 7 years, the kid is 18 now, so you rush down to town, buy cards for 'Now you are One!'... etc up to 'Now you are 18' and stick a coin in each one.

However, your comments made me think (a rare occurrence!)

Somebody dies in 2024 and their grandchildren take possession of a biscuit tin full of sovereigns left for them with a signed letter: 'Been saving up these gifts for you every year between 1975 and 2005'. Is the date of the gift 2024 and therefore taxable, or earlier, as implied by the letter?

Steve

[Howard]

I was going to make similar comments. Growing up, apart from a bit of help needed for living expenses, uni was completely free. I was careful with money and never received a big windfall, but if I had, I would have appreciated it most in my early thirties when I finally had a decently-paid job and the house-buying and starting a family business began.

We have two sons, one very much like me, the other terrible at budgeting and saving and still studying.

So, a large sum of money falling into their laps may be used wisely by one, but wasted by the other.

The thought of our kids or nephews, nieces receiving a huge sum at 18 is quite terrifying!

Steve

This is the dilemma with bare trusts. Having helped children significantly it is nice to think about helping grandchildren. Our grandchildren seem pretty sensible as youngsters (in some cases more so than their parents ). So getting five figure bare trust proceeds at 18 will probably be ok. But a six figure sum at 18?

A discretionary trust doesn't look like the answer to me. The experiences of friends and contacts suggest they can create more problems than they solve and the costs can be prohibitive. I know a professional trustee who made a tidy sum from "helping" clients. A friend was the daughter of one of his clients and the result of the trust was pretty disastrous for her - but very rewarding for him! It could have caused serious family issues and a sad memory of the parent who was lovingly cared for. But to the daughter's credit she was very forgiving.

regards

Howard

[Lootman]

Why would there be "question of legality" about making gifts (gold or not) to a grandchild? As far as I am aware gifts are not taxable, and do not even need to be reported whilst you are alive nor if your death occurs more than 7 years after the gift.

Loot (grandfather)

Sorry. My fault for not explaining very clearly. I think the idea was about somebody doing this retrospectively. i.e. you think you may not last another 7 years, the kid is 18 now, so you rush down to town, buy cards for 'Now you are One!'... etc up to 'Now you are 18' and stick a coin in each one.

However, your comments made me think (a rare occurrence!)

Somebody dies in 2024 and their grandchildren take possession of a biscuit tin full of sovereigns left for them with a signed letter: 'Been saving up these gifts for you every year between 1975 and 2005'. Is the date of the gift 2024 and therefore taxable, or earlier, as implied by the letter?

Guessing I would think that a gift is not made until it is unconditionally handed over to the recipient.

By retaining the biscuit tin, a benefit is reserved by the donor i.e. the ability to revert the "gift". In fact even handing it over but saying something like "Do not spend it as I may need it back" could constitute a reservation of benefit.

Of course if each gift is only a quid then it is not going to matter anyway as that is covered as an allowable annual small gift.

[helfordpirate]

Guessing I would think that a gift is not made until it is unconditionally handed over to the recipient.

I think a valid gift needs intent, delivery and acceptance (which is assumed if not explicitly rejected). I think what is missing here is "delivery"!

On a minor point, a gift can be taxable if it is not cash - as it is a disposal for CGT purposes - and may create a tax liability for the donor. So no CGT for Sovereigns but possibly for Krugerands and shares etc.

[scrumpyjack]

I was going to make similar comments. Growing up, apart from a bit of help needed for living expenses, uni was completely free. I was careful with money and never received a big windfall, but if I had, I would have appreciated it most in my early thirties when I finally had a decently-paid job and the house-buying and starting a family business began.

We have two sons, one very much like me, the other terrible at budgeting and saving and still studying.

So, a large sum of money falling into their laps may be used wisely by one, but wasted by the other.

The thought of our kids or nephews, nieces receiving a huge sum at 18 is quite terrifying!

Steve

This is the dilemma with bare trusts. Having helped children significantly it is nice to think about helping grandchildren. Our grandchildren seem pretty sensible as youngsters (in some cases more so than their parents ). So getting five figure bare trust proceeds at 18 will probably be ok. But a six figure sum at 18?

A discretionary trust doesn't look like the answer to me. The experiences of friends and contacts suggest they can create more problems than they solve and the costs can be prohibitive. I know a professional trustee who made a tidy sum from "helping" clients. A friend was the daughter of one of his clients and the result of the trust was pretty disastrous for her - but very rewarding for him! It could have caused serious family issues and a sad memory of the parent who was lovingly cared for. But to the daughter's credit she was very forgiving.

regards

Howard

I agree that trusts, other than simple bare trusts, often cause more problems than they solve. Bare trusts are simple and have worked in my family and I hope will work for the grandchildren. Often, in our family, the trustees have 'forgotten' to mention the bare trust to the child so that at age 18, they don't know it exists! Where they do know it exists the parent has forgotten to transfer it all into their name, so they have to go through the parent to get at it. Obviously they have a legal right to insist on full access at 18 but this has never in fact happened in our family. Also obviously one needs to make sure that any tax due is paid, because the dividends are at all time the child's personal income and, if they start earning, may incur tax.

[Howard]

This is the dilemma with bare trusts. Having helped children significantly it is nice to think about helping grandchildren. Our grandchildren seem pretty sensible as youngsters (in some cases more so than their parents ). So getting five figure bare trust proceeds at 18 will probably be ok. But a six figure sum at 18?

A discretionary trust doesn't look like the answer to me. The experiences of friends and contacts suggest they can create more problems than they solve and the costs can be prohibitive. I know a professional trustee who made a tidy sum from "helping" clients. A friend was the daughter of one of his clients and the result of the trust was pretty disastrous for her - but very rewarding for him! It could have caused serious family issues and a sad memory of the parent who was lovingly cared for. But to the daughter's credit she was very forgiving.

regards

Howard

I agree that trusts, other than simple bare trusts, often cause more problems than they solve. Bare trusts are simple and have worked in my family and I hope will work for the grandchildren. Often, in our family, the trustees have 'forgotten' to mention the bare trust to the child so that at age 18, they don't know it exists! Where they do know it exists the parent has forgotten to transfer it all into their name, so they have to go through the parent to get at it. Obviously they have a legal right to insist on full access at 18 but this has never in fact happened in our family. Also obviously one needs to make sure that any tax due is paid, because the dividends are at all time the child's personal income and, if they start earning, may incur tax.

Thank you, Scrumpyjack, for the very helpful comments.

It has occurred to me that one might set up two bare trusts for each grandchild. One of which could be "forgotten" by the parents until the grandchild has sensibly spent the first and is years older. Is this possible under the current legislation? Obviously all trusts would be registered and legally the grandchild's after they are 18. I realise this places the onus on one's children as one may not be around when grandchildren are in their late twenties or later. It would just be covered in one's letter of wishes perhaps?

Whilst this approach could work, one's children would need to manage the investments and tax if one has passed away in the interim, so maybe they should be the people to set the second trusts up but funded by a gift from the grandparents?

regards

Howard