Supporting your children and grandchildren might be one of the important goals you consider when creating your financial plan. By helping them financially now, you could give them a good start in life and encourage them to build their own plan for the future. That way, you can rest easy in the knowledge that they’ll be secure after you’re gone.
However, it’s important to consider the potential tax implications of this support, particularly if you’re gifting money to your children or grandchildren while you’re alive. For example, you or they could be affected by:
- Inheritance Tax (IHT)
- Income Tax
- Capital Gains Tax (CGT)
Luckily, there are some simple ways to potentially mitigate a large tax bill and transfer more wealth to your loved ones.
Read on to learn five tax tips to help you financially support your children or grandchildren.
1. Make use of Inheritance Tax exemptions
Lifetime gifts may be a useful way to pass wealth to your children or grandchildren and potentially mitigate IHT. However, there are specific rules about gifting and it’s important you understand them so you can avoid accidentally triggering a tax charge.
Normally, the first £3,000 you gift each year falls outside your estate for IHT purposes and won’t trigger a tax charge. This is your “gifting annual exemption”. You can also give £5,000 to a child or £2,500 to a grandchild or great-grandchild for their wedding without triggering a tax charge.
Additionally, you can make small gifts of up to £250 to as many people as you like, as long as you haven’t used any of your gifting annual exemption on them.
Any gifts that exceed your exemptions may also fall outside your estate for IHT purposes, provided you survive for seven years after making the gift.
In some cases, you can also make unlimited tax-free gifts using the “gifts from income” rules. Using this exemption, you can make as many regular gifts as you like, and they’ll fall outside your estate for IHT purposes provided they:
- Are regular
- Come from your income and not other sources such as your savings
- Don’t affect your lifestyle.
You can find more information about this in our recent article on the gifts from income rule and how it could help you mitigate IHT.
If you’re financially supporting your children or grandchildren, you may want to consider how much wealth you pass on each year so you can make efficient use of the various IHT gifting exemptions.
It could also be useful to keep a record of any gifts to pass to your executors. They’ll need this information when administering your estate and calculating what IHT is due.
You may want to seek professional guidance here as any mistakes with IHT exemptions and gifts could result in a large surprise tax bill for your family when you pass away.
2. Be aware of the tax you might pay on cash savings for children
If you’re saving money for your children or grandchildren to help them achieve milestones such as buying their first car or home, you might need to consider the Income Tax you could pay.
Yet, according to IFA Magazine, only one-fifth of parents understand how cash savings in their child’s name could be taxed. Additionally, one-fifth of parents assume that interest earned on their child’s savings would be tax-free, but this is not necessarily the case.
Typically, you have a “Personal Savings Allowance” (PSA), the amount of interest you can earn on your savings before paying tax. In the 2024/25 tax year, this is:
- £1,000 for a basic-rate taxpayer
- £500 for a higher-rate taxpayer
- £0 for an additional-rate taxpayer.
Any interest that exceeds your PSA is taxed at your marginal rate of Income Tax.
Crucially, many people don’t realise that when savings in a child’s name earn interest of £100 or more, that interest is taxed as if it belonged to the parents.
So, if you’ve already used your PSA, you could pay tax on the interest from your child’s savings too. It’s important to consider this when building wealth for children and grandchildren and be aware that they could lose a portion of their interest to tax.
Alternatively, you could potentially mitigate a large tax bill by saving in a tax wrapper such as an ISA – find out more below.
3. Make use of their full Junior ISA allowance
ISAs are an excellent vehicle for tax-efficient saving and investing that your children and grandchildren could benefit from.
Any child under the age of 18 who lives in the UK is eligible for a “Junior ISA” (JISA) and you can pay into it on their behalf.
A JISA offers the same tax benefits that other ISAs do so there is no Income Tax to pay on savings interest, and no Capital Gains Tax (CGT) or Dividend Tax from investments held in a JISA.
There are two types of JISAs:
- Cash JISA, essentially a tax-efficient savings account
- Stocks and Shares JISA, allowing you to invest in a range of assets.
A JISA must be opened by the child’s parent or legal guardian. So, if you want to save for grandchildren, you’ll need to ask a parent to open the account. The child can manage their own savings when they’re 16 and access the funds when they’re 18.
In the 2024/25 tax year, you can pay up to £9,000 into a JISA and this is separate from your adult £20,000 ISA allowance.
Using the full JISA allowance each year could help you make more tax-efficient savings and investments for a child or grandchild.
4. Consider a Lifetime ISA for adult children
You might continue supporting your children into adulthood, especially during the cost of living crisis. According to Professional Paraplanner, 29% of parents born between 1965 and 1980 were financially supporting their adult children at the start of 2024.
In this case, you may want to consider encouraging a child or grandchild between the ages of 18 and 39 to open a Lifetime ISA (LISA) and giving them money to contribute to it.
A LISA is an account specifically for young adults looking to buy a first home or make a start on their retirement savings, and has the same tax-efficient advantages as other ISAs. Your child or grandchild can contribute up to £4,000 a year to this type of ISA, which counts towards their overall ISA allowance (£20,000 in 2024/25).
There are both Cash and Stocks and Shares LISAs, meaning your child can choose whether to save or invest through this type of account, too.
Crucially, the government offers a 25% bonus on LISA contributions. So, if they contribute the full £4,000 each tax year, this is topped up to £5,000.
That means giving your child money to contribute to a LISA could be even more powerful as they could receive a 25% bonus on top of the gift, as well as the usual tax benefits of an ISA.
Bear in mind that if your child withdraws the money before age 60 for any other reason than buying their first home, they’ll usually face a 25% tax charge.
5. Take advantage of tax relief on third-party pension contributions
We typically start thinking about pensions as we get older and look ahead to retirement, but you can start saving at any age. Starting or contributing to a pension for a child or grandchild could be a great way to give them a head start with retirement saving and it has some potential tax benefits too.
When you contribute to a pension, you normally receive 20% tax relief at source. This means that a £100 contribution effectively “costs” £80, as the other £20 comes from the government in the form of tax relief.
If you’re a higher- or additional-rate taxpayer, you may be entitled to 40% or 45% tax relief but you need to claim the extra 20% or 25% through self-assessment.
Interestingly, when you pay into somebody else’s pension on their behalf, the contributions are treated as if they made the payments themselves. As a result, they benefit from tax relief.
You can start a junior pension for a person of any age, even from the day they are born, so you can support your children or grandchildren at any stage of their life.
Bear in mind that the contributions count towards their “Annual Allowance” – the amount they can contribute to their pension each year without triggering a tax charge. In the 2024/25 tax year, this is £60,000 or 100% of their earnings (whichever is lower).
However, if they’re not earning an income, as is likely the case with a young child or grandchild, their Annual Allowance is £3,600 a year.
Third-party contributions to a child or grandchild’s pension could be more valuable than cash gifts or savings elsewhere as they benefit from tax relief. Additionally, the funds will be invested so they may see the wealth grow over time and the earlier you start contributing, the greater this growth could be.
Using these various rules and allowances could help you remain tax-efficient when financially supporting your children or grandchildren.
Get in touch
If you want to support your loved ones, we can help you find the most tax-efficient ways to do so.
Please get in touch to find out how our team of VouchedFor Top Rated planners could help today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.