Five tax breaks that EVERY grandparent must know: How to help other family members and improve your own finances
It has been a tough year for grandparents, with lockdowns and social distancing keeping millions away from their loved ones.
While many have been kept from offering the childcare and social support they normally would provide to grown-up sons and daughters and other family members, there are several ways grandparents can help financially – and improve their own finances.
1. Boost state pension
If you look after your grandchildren, you could be eligible for a boost to your pension, worth around £250 a year.
Self help: There are several ways grandparents can help financially – and improve their own finances
When you care for grandchildren while their parents work, you earn credits towards your National Insurance record. You may even be eligible if you have not been able to see your grandchildren in person due to Covid restrictions. If you provided care via the phone or video, that may also count. The so-called ‘specified adult childcare credits’ can only be claimed by someone who is not working, but below state pension age.
2. Cut inheritance tax
An often-overlooked inheritance tax exemption can allow grandparents to chip in towards their grandchild’s education costs without risking a tax liability.
Gifts of any amount are free from inheritance tax if made regularly and out of income rather than savings.
Carla Morris, financial planner at wealth manager Brewin Dolphin, says: ‘It is important you keep good records by making a note of what you gave, who you gave it to, when you gave it and how much.’
3. No tax on interest
If a child gets more than £100 of annual interest from money given to them by a parent, the parent may have to pay tax on it. However, there is no tax to pay if the money was given by a grandparent.
In practice, parents only have to pay tax if they gift a particularly large sum to a child. To be liable for tax, they would have to exceed their tax-free personal savings allowance of £1,000 a year – £500 for higher rate taxpayers.
Richard Jameson, a partner at accountancy firm Saffery Champness, says grandparents can also pay into a grandchild’s Junior Isa, although it must be opened by a parent or guardian. Current Jisa rules allow £9,000 a year to be squirrelled away in a tax-free account – with the proceeds being able to be withdrawn from age 18.
Grandparents can also buy Premium Bonds on behalf of grandchildren aged under 16. They can invest from £25 to £50,000.
4. Granny flat bonus
Homes with a self-contained annexe or granny flat used to be liable for a higher rate of stamp duty. That’s because they were treated as two dwellings, and anyone who buys a second home has to pay extra stamp duty. But two years ago, the Government realised this was unfair and updated the rules so a property with a granny flat is treated as one dwelling.
The only conditions are that the main part of the house is worth at least two-thirds of the value of the whole property and the granny flat is situated in the grounds of the main property.
5. Wedded bliss on gifts
If you make large gifts to anyone except your spouse, they may incur inheritance tax if you do not survive for seven years after making them.
But there are a few exceptions. Anyone can pass £3,000 worth of gifts each tax year without risking an inheritance tax bill. In addition, anyone can gift up to £1,000 per person as a wedding or civil ceremony gift.
The allowance is greater for grandparents. If a grandchild is getting married, grandparents can make gifts of up to £2,500.
MAKE YOUR GRANDCHILD A MILLIONAIRE AT 43
Grandparents can also help turn their grandchildren into pension millionaires.
Pensions are one of the most lucrative ways of saving for a grandchild’s future. All pension contributions are topped up by the taxman and have decades to grow. In fact, if a grandparent were to pay just £40 a month into a pension from the day their grandchild was born until they hit 18, they could have built up a pot worth nearly £100,000 when the grandchild reaches retirement age. For every £40 paid by a grandparent, the tax- man tops up by another £10.
Increase the contributions to £240 a month and the grandchild could be a pension millionaire by their 43rd birthday, according to figures from Brewin Dolphin. That is assuming the pension pot grows by eight per cent a year due to stock market returns.
However, the child would not be able to access the money until the age of 57 and they are likely to have many other financial pressures in the interim – such as buying their first home.