The Bank Holiday weekend was enlivened for many by the birth on Saturday morning of the Duke and Duchess of Cambridge’s second child, Princess Charlotte, a second grandchild for the Prince of Wales. Whilst the new princess was the most prominent birth over the weekend there will have been many other people who became grandparents on the same day, perhaps for the first time.
Many of those new grandparents will be thinking about how best to financially benefit the new members of the next generation. Some may be considering changing their Wills to include legacies to grandchildren and, in some cases, if the grandchild’s parents are already well established in life, then the grandparents might consider skipping a generation and leaving part, or all, of their estate direct to the grandchildren. This is good Inheritance tax (IHT) planning as it avoids assets going through the parents’ estates and thus a possible double charge to IHT.
If you are considering a more substantial gift to young grandchildren in your Will it would, however, be advisable to consider protecting their inheritance with some form of trust. A trust can ensure that the grandchild’s share of your estate is protected both from third party claims (that might arise say on divorce) or from the grandchild’s own actions if he or she turns out to be less sensible than you might wish. In some cases it can also help mitigate IHT liabilities by keeping assets outside of your grandchild’s estate.
If you do not have grandchildren yet, but hope to do so in due course, it is never too soon to start tax planning to benefit this generation. Gifts to trusts within the current IHT nil rate band (£325,000 for an individual; £650,000 for a couple) are IHT free if the person making the gift survives by seven years so clearly the earlier gifts are made the better. If you do not have grandchildren yet then a gift could be made to a discretionary trust for the benefit of future grandchildren and other beneficiaries. This will start the seven year survivorship period running and you will retain flexibility over how your gift is used to benefit your family.
One tip that should be borne in mind, if you are planning a gift to a trust and other gifts to individuals outright, then you should make the gift to the trust first as, if you were not to survive by seven years, this would minimise the ongoing tax charges on the trust.