The older generation are stepping in to help youngsters

With many youngsters struggling to pay for university tuition fees and housing costs soaring, the older generation is increasingly stepping in to help out. 

But in assisting the young, it is key to think carefully about the best way forward while avoiding falling foul of tax rules.

Property 

Growing numbers of grandparents are now giving cash to their grandchildren for a deposit on a first home.

Anna Brotherton, 28, from Lichfield, Staffordshire, had help from her grandmother Dorothy Woodman, 98, to purchase her first home.

Anna graduated from university in 2010 and was training to be a teacher when her parents and grandmother took her out for a meal. 

Dorothy then told Anna she had been saving on her behalf since she was a baby.

‘I was quite emotional when Nan told me,’ says Anna. 

‘I had worked part time while a student to keep my debts low and I was quietly saving for a deposit on a home.

‘Nan’s gift meant I could realise that dream much earlier. I will always be so grateful for her generosity.’

Anna was able to add Dorothy’s £4,000 gift to her own savings to put down a deposit on a two bedroom home in Great Barr, Birmingham.

A religious studies teacher, Anna married fellow teacher Matthew, 31, last year and they have since moved to Lichfield.

But Anna says getting on the property ladder early reaped rewards as her first house increased significantly in value.

Although Anna’s grandmother was able to help out with cash, many grandparents are choosing to release equity from their homes to get grandchildren on the ladder – effectively recycling housing wealth. 

Dan Baines is commercial director at independent equity release adviser Age Partnership. He says using cash to help family is among the top reasons people cite for releasing equity from their home.

He says: ‘Inter-generational gifting is becoming more popular as the younger generation struggles to get a foothold on the property ladder. 

‘This cash can be a financial godsend for many. We regularly hear from customers who are delighted to have helped loved ones get ahead during their own lifetime.’

Homeowners need to be aware of inheritance tax when gifting lump sums to grandchildren – whether as an outright gift from capital savings or through equity release.

The nil rate band threshold for inheritance tax is £325,000 per person or £650,000 for a married couple or civil partnership when the first nil rate band is passed on after death.

There is also an additional residential nil rate band of £100,000 – per person – for which some estates will qualify. This comes into play when a home is passed on to children and could result in a total exemption from inheritance tax of £850,000.

If you die within seven years of making a sizeable gift and your estate is liable to inheritance tax then the gift will have to be considered part of your estate for tax purposes. The tax is levied at a flat 40 per cent on assets over and above the nil rate band threshold.

Investments 

Retired university lecturer Barrie Trinder, 78, worries about the growing financial pressures on young people. 

The introduction of university tuition fees means that graduates are leaving higher education with some £44,000 of debt.

It is with this in mind that Barrie, who lives with wife Barbara in Olney, Buckinghamshire, saves regularly for his only grandchild Marcus, nine.

On every birthday since he was born, and at Christmas, Barrie has put cash aside for Marcus into an investment fund.

Regular gifts: Experienced investor Barrie Trinder, pictured, set up a tax-free fund for his grandson Marcus

The regular gifts are always tax-free because they are absorbed by Barrie’s annual allowance for gifting under inheritance tax rules.

It means Marcus’s investment pot has already grown to a healthy £20,000 – with many more years to go before he will need to access it to fund his way through university or use as a home deposit.

There are risks involved with equity investing, as sharp stock market falls over the past few days have highlighted. But as Marcus’s experience has already demonstrated, investing long term can reap rich rewards.

Barrie, an experienced investor, chose M&G’s Global Themes fund for Marcus’s money. The fund is invested internationally and is up more than 40 per cent over the past five years.

He says: ‘Cash as a saving tool is a waste of time when you have so many years to play with, as Marcus does. Savings rates are so low any return would be paltry.

‘But with an equity investment hopefully there will be a healthy return although there will be setbacks along the way.’

To emphasise his point, a £50 per month investment in a cash savings account started in 1999 would have generated a fund of £11,426 by the end of last year – £626 more than the £10,800 of contributions made.

In contrast, the same monthly sum in an investment fund tracking the performance of the FTSE All Share Index would have produced a final pot worth nearly £22,500.

Tax-efficient Isas

Junior Isas – known as Jisas – are one of the best places to start investing for children. Both cash and equity Jisas are available and when the money can be accessed at age 18, it is tax-free.

In Barrie Trinder’s case he could not open a Jisa for Marcus because his grandson already had a Child Trust Fund – the precursor to Jisa – opened by his parents.

Cash Jisas are more popular but equity Jisas are the better option as there is greater scope to grow the funds invested. Any child under 18 who does not have a Child Trust Fund can have a Jisa. Those with old style Child Trust Funds can switch them into Jisas.

Although only parents can open a Jisa, grandparents and other family members can also contribute to them. 

The annual limit is £4,128 per child, but this rises to £4,260 at the start of the new tax year on April 6.

Juliet Schooling Latter is research director at investment broker Chelsea Financial Services in South West London. 

She believes that where possible grandparents should opt to use a Junior Isa if saving for a grandchild.

This is because the pot can grow without fear of capital gains tax being applied.

A potential drawback with a Jisa is that the child has access from age 18. 

Schooling Latter says: ‘That is fine if the child is sensible and intends either to use it for university fees or leave it invested. Not so if they choose to spend the proceeds down the local pub.’

Parents and grandparents can save from as little as £10 per month into some Jisas. For those like Barrie who are happy to invest on behalf of a grandchild, Schooling Latter recommends investment funds such as Axa Framlington Global Technology, Fidelity Global Special Situations and Baillie Gifford Global Discovery. 

Investment trust F&C Global Smaller Companies is another favourite.

Pensions 

Although setting up a pension is usually low down the list of priorities for youngsters, it is an excellent way to kick-start a long-term savings pot. 

Parents and grandparents can save into a pension on behalf of a child, with any contributions receiving a tax boost from Government – even though the child is not a taxpayer.

The maximum annual contribution is £2,880 per child, which is then increased by 20 per cent tax relief to £3,600.

New pension freedom rules, introduced in 2015, mean it is now possible to pass any proceeds from a pension fund to children or grandchildren free of inheritance tax

Trust manager Fidelity offers a Junior self-invested personal pension with monthly contributions starting from £50 per month. Hargreaves Lansdown and Alliance Trust Savings offer similar plans.

The proceeds cannot be accessed until age 55 (rising to 57 from 2028). This may appeal to some families as it removes the worry of youngsters spending all their savings when they reach age 18. But it will not help youngsters grapple with education costs or home deposits.

Danny Cox is head of communications at Hargreaves Lansdown. He says that as a pension provides a long investment horizon, grandparents should be brave when deciding where to invest. This means looking at emerging markets. 

He says: ‘The road might be bumpy in the short term but over time emerging market investments could bring great investment results.’

New pension freedom rules, introduced in 2015, mean it is now possible to pass any proceeds from a pension fund to children or grandchildren free of inheritance tax.

The pension must be defined contribution-based and it can only be passed on if you die before age 75. It must also be held in a particular type of trust so independent financial advice is essential.

Pass on your wealth through gifts – without being hit by the taxman 

PRESENT: Allowances include £5,000 per child for a gift towards a wedding

• Everyone has an annual gift exemption. As a result, you can give away up to £3,000 tax-free each tax year. You can carry forward any unused annual exemption to the next tax year – but only for one year.

• Each tax year you can also give away wedding and civil ceremony gifts of up to £5,000 per child, £2,500 per grandchild or great-grandchild, and up to £1,000 for others. You can use more than one exemption on the same person, so you could make gifts to a grandchild for their birthday (out of the annual £3,000 allowance) and for a wedding present in the same tax year.

• Gifts up to £250 per person can be made during the tax year as long as you have not used up another exemption on the same person.

• Unlimited gifts can be made from income, for example for birthdays and Christmas. These are exempt from inheritance tax as long as the gifts do not reduce your standard of living. The tax office has form IHT403 which provides an income and expenditure analysis to help determine how much surplus income, after tax, an individual has per tax year. For more details visit gov.uk/inheritance-tax/gifts.

• The Government has just announced a review of the inheritance tax rules. The objective is to simplify them – and in some instances increase the exemptions to make them more meaningful. But any changes might take several years to kick in.