There can be a number of reasons why grandparents wish to provide for their grandchildren directly, instead of their children, and this will depend on their own family and financial circumstances.
One significant reason why grandparents provide for their grandchildren rather than their children, is that they might also have an inheritance tax liability in their own right. Skipping a generation could therefore be a sensible way moving money down the bloodline without causing further tax issues.
The money which has been earmarked for grandchildren could be used for a wide range of reasons, such as to cover the cost of private education, house deposit, wedding, build-up of pension benefits, or other significant life events.
Whilst junior ISAs and pension have their own tax benefits, they both have restrictions on how much can be contributed each tax year. As such, an alternative approach by grandparents might be to use a bare trust as a way of building up money for their grandchildren.
Why use a Bare Trust?
One of the most popular and simple types of trust for a grandchild is a bare trust. In this type of account, the assets are held in the name of the trustee (e.g. the grandparent) but are designated to the beneficiary (e.g. the grandchild) who will be able to access the funds at age 18.
A gift made to establish a bare trust will be classed as a potential exempt transfer (PET) for inheritance tax purposes for the grandparent and will not be completely out of their estate for 7 years after the gift has been made. However, the benefit of a bare trust over other types of trust is that there is no limit on how much can be added to the trust.
The beneficiary (grandchild) is absolutely entitled to the trust capital and income generated from it. This means any income of capital generated is assessed on them. Income and gains could therefore be tax free if personal tax allowances are not exceeded.
Once the bare trust is set up and money placed into the trust, it is important to ensure a suitable investment strategy is established, which is often determined by the length of time the money will be held in trust. As a general rule, the longer the investment timescale, the greater ability there is to adopt investment risk.
Should you wish to learn more about the benefits and features of Bare Trust investments and establishing a suitable investment strategy, please contact one of our financial planning consultants.
This article should not be construed as advice or a personalised recommendation. The most suitable solution for you will depend on your own personal circumstances.
No action should be taken without seeking further formal advice.
MHA Moore and Smalley is regulated by the Financial Conduct Authority, FCA registration number 448716.
