Grandparents urged to act now to avoid large inheritance tax bill

Grandparents can lend a helping hand to their grandchildren and reduce their inheritance tax liability by giving their loved ones gifts.

Analysts at RBC Brewin Dolphin have urged grandparents who may want to pass on gifts to their children to consider giving funds to their grandchildren as well, to help them out as they start out in life.

Giving gifts also reduces the size of a person’s estate that can be hit by inheritance tax (IHT) when they die and their assets are passed on.

Inheritance tax is a sizable 40 percent tax that affects any total assets inherited above £325,000 from a single person or above £650,000 from a couple.

A person can reduce the size of their estate and so minimise their inheritance tax liability by giving away IHT-exempt gifts.

Carla Morris, financial planner at RBC Brewin Dolphin, said: “While it’s possible to leave money to grandchildren through your will, this is one of the least tax-efficient ways to pass on wealth. It could also come too late to make a meaningful difference to your grandchild’s life.”

A person can give away up to £3,000 each tax year IHT-free divided among any number of people.

There is also the option to separately give away any number of gifts up to £250 for each person gifted an amount.

Grandparents can give away a larger amount and still avoid the tax as long as they survive for another seven years after the gift is given.

The proportion of tax the inheritor will pay on this amount reduces as the years progress towards the seven-year anniversary.

There are other ways grandparents can pass on their wealth to their grandchildren while they are still alive.

One way is to invest funds in a Junior ISA. Ms Morris said: “If your grandchild is still young, investing in a Junior ISA is a great way of building up money for their future.

“Only parents or legal guardians can open a Junior ISA, but anyone can contribute, so long as those contributions don’t exceed £9,000 a year. This is a great way to pass on wealth, particularly if you’d like to gift semi-regularly”.

A grandparents may also want to look at setting up a bare trust to look after funds they want to pass on to their grandchildren.

There are no investment limits on this type of trust and the money can be used at any time to help the child, such as for school costs.

Money or investments in a bare trust will be taxed as if they belong to the child, meaning they will pay little or no tax on any income derived from the trust or on any growth of the funds.

For the latest personal finance news, follow us on Twitter at @ExpressMoney_.