Financial support from grandparents can play a significant role in shaping the future of younger generations. One of the most effective ways for grandparents to assist is by gifting money, which can be strategically used to maximise financial benefits for their grandchildren. This article explores how grandparents can gift money, the annual exemption rules, and how these gifts can be used to fund Junior ISAs or Junior SIPPs. This does come at a time when lots of newspapers are reporting the inheritance tax rules are under review, but it can be a great way to help a younger generation get a financial foothold for when they become adults.
Understanding the £3,000 Annual Exemption Rule
What is the £3,000 Annual Exemption?
In the UK, individuals can gift up to £3,000 each tax year without incurring inheritance tax. This is known as the annual exemption. Grandparents can either gift the entire £3,000 to one person or split it among several recipients. This exemption resets every tax year, which runs from 6 April to 5 April the following year.
Unused Allowances can be next in the next year
If the annual exemption is not fully utilised in one tax year, the unused amount can be carried forward to the next tax year, but only for one year. This means grandparents can potentially gift up to £6,000 in one tax year if they did not use any of their exemptions in the previous year.
Maximising the Benefits of Gifting: Junior ISAs and Junior SIPPs
What is a Junior ISA?
A Junior ISA (Individual Savings Account) is a tax-efficient savings account designed for children. The funds in a Junior ISA can grow tax-free, and once the child turns 18, they can access the money without any tax implications. There are two types of Junior ISAs: cash Junior ISAs and stocks and shares Junior ISAs.
What is a Junior SIPP?
A Junior SIPP (Self-Invested Personal Pension) is a pension account for children. Contributions to a Junior SIPP benefit from tax relief, meaning the government adds 20% to the contributions. The funds in a Junior SIPP grow tax-free, and the child can access the pension at retirement age. Someone can pay a maximum of £2,880 per year into this wrapper, which becomes £3,600 through 20 per cent tax relief from the UK Government.
Examples of Using the Annual Exemption for Maximum Benefit
Example 1: Gifting in a Single Year
Imagine a grandparent, Mrs. Smith, who wants to gift money to her granddaughter, Emma. Mrs. Smith did not use her annual exemption in the previous tax year, so she has £6,000 available (£3,000 from the current year and £3,000 carried forward). She decides to gift the entire £6,000 to Emma, who can then use this money to fund her Junior ISA.
Emma’s Junior ISA benefits from tax-free growth, and by the time she turns 18, the account could have grown significantly, giving her a substantial financial head start. if Emma’s Junior ISA grows at 6% per annum, the £6,000 investment could grow to approximately £15,288 by the time she is 18 years old. If £3,000 is added to Emma’s Junior ISA every year, the total amount in the ISA could grow to approximately £92,688 by the time she is 18 years old.
Example 2: Splitting the Gift
Mr. Johnson wants to support his three grandchildren by splitting his annual exemption. He decides to gift £1,000 to each grandchild every year. If Mr. Johnson didn’t use any of his exemption last year, he can carry forward the unused amount and gift £2,000 to each grandchild this year.
Each grandchild can use the money to fund their Junior ISAs or Junior SIPPs, benefiting from tax-free growth or government tax relief, respectively.
Example 3: Strategic Gifting Over Multiple Years
Mrs. Taylor wants to maximise her annual exemptions for her two grandsons over several years. In the first year, she uses her full £3,000 exemption, gifting £1,500 to each grandson. The following year, she gifts her total allowance of £3,000 evenly split to each grandson, who can then invest this money into their Junior SIPPs.
The contributions to the Junior SIPPs receive a 20% tax credit (which is equivalent to £1875 gross amount, significantly enhancing the long-term value of the pensions. By the time the grandsons retire, these contributions will have grown substantially, providing a strong financial foundation.
Intergenerational gifting to those starting out in life
Grandparents have a unique opportunity to provide significant financial support to younger generations through strategic gifting. By understanding and utilising the £3,000 annual exemption rule, carrying forward unused allowances, and investing in Junior ISAs and Junior SIPPs, grandparents can ensure their gifts have a lasting, positive impact on their grandchildren’s financial futures. With careful planning, these gifts can grow tax-free or benefit from government tax relief, maximising their value and providing a substantial financial head start.