How financially supporting your grandchildren can benefit you too
With a new government, a football final and reports that the sun has been spotted in the sky, the summer has suddenly become very interesting!
But once it’s over, how will things feel for students going to university for the first time?
It’s well known that navigating the financial challenges of higher education is getting more difficult. So with the start of the new term approaching, we thought it would be a good idea to take a look at how supporting your grandchildren financially through their degrees could help not just your loved ones, but you too.
Student life
Tuition fees for students from England currently stand at up to £9,250 a year. Then there the additional costs associated with living expenses and studying.
Part-time jobs can of course help, but they often pay minimum wage and don’t offer enough hours to make a significant dent in expenses. As a result, many students resort to taking out substantial student loans, which can lead to significant debt that takes years to repay – the Student Loans Company says graduates in England now leave university with average debts of £44,940.
It’s no wonder then that almost half (49%) of university students and graduates said that the prospect of student debt made them think twice about taking up their place at university.
However, there is a solution: by supporting your loved ones financially through university, you could not only help to make a difference to your grandchildren’s future, but you could also reduce the value of your own estate, which can help to mitigate inheritance tax (IHT).
What is inheritance tax?
IHT is charged on the value of an estate above a certain threshold. The current IHT threshold is £325,000, which means that anything above that will be taxed at 40% when you die.
Your ‘estate’ refers to the value of your assets, which can include cash in the bank, investments, property, vehicles etc. The figure of £325,000 can therefore soon mount up. This is why, increasingly, IHT planning isn’t just for ultra-wealthy people.
The good news is that there are ways around this so that you minimise or even avoid IHT altogether. One example of this is to pass your money onto your loved ones.
The act of giving
There are many ways you can pass on money to relatives. You could of course leave your inheritance in a will. However, you can also pass money on during your lifetime, which means that you get to see the benefit it has on your loved ones at key moments in their life.
However it’s important to keep on top of the rules as some of these gifts are taxable. In general, there’s no tax to pay if you:
Hand out less than £3,000 in a tax year. You can carry forward any unused allowance to the next year (but only for one year). This means you can pass on £6,000 if you didn’t give away any money in the previous tax year.
The gifts are small. You can make gifts of less than £250 per person, for example, providing the recipient hasn’t already benefitted from the £3,000 allowance above.
You gift the money more than seven years before you die. If you die within seven years of giving your money away, it will be considered part of your estate and taxed accordingly, which means the earlier you gift, the better.
It’s a good idea to keep a record of any financial gifts you give because this will help you to keep on top of your tax allowances (or you could let us know).
It’s not just university you could support them with. Other key milestones such as getting married or buying a home are equally valid when it comes to tax-free gifting. Each parent can give their child up to £5,000 as a wedding present without it being taxed. Each grandparent can give up to £2,500.
It’s important of course to make sure that you’re financially secure yourself before giving your money to others, however, this is where we can help too. We can analyse your ‘financial resilience’ and weigh that up against the tax advantages of passing your wealth on. As with many aspects of financial planning, this is an important balancing act.
Additional structure
Let’s say you like the idea of giving your grandchild £3,000 in order to make use of your annual exemption and to help them with their degree, but that you’d like to make sure it’s used for that purpose and not something else!
Well this is where setting up a ‘discretionary trust’ can be useful as it provides some control over how the money is used. The trustee can decide to release funds when grandchildren reach a certain age or meet certain conditions, such as completing their education.
And it also ring fences that money, so it’s not counted as part of your estate.
So there you have it. Supporting your grandchildren – whether it’s through university or for another life event - not only benefits their future, but can also provide you with a means to manage your estate effectively too. And by gifting money in your lifetime, you get to see them enjoy their inheritance.
Please get in touch if you’d like find out more about the options available to you.