How to give money to your grandchildren and the best ways to save and invest for their future (2023)

Many grandparents want to give money to their grandchildren, but it can be hard to wade through the range of product choices and to understand the tax rules that apply. Grandparents might be putting money away for young children to be used at some point in the future, or they might be gifting money on a regular basis in the form of pocket money or to pay for things such as driving lessons.

In the UK, each grandparent can give away £3,000 a year to family members free from inheritance tax. They can also make as many small gifts of up to £250 as they like provided they are not to the same person. Of course larger amounts can be paid, but these payments could be subject to tax if the grandparent does not survive for a further seven years.

Inheritance tax of 40 per cent is levied on the value of a person’s estate on death and includes property, money, investments and possessions. But it is only applied when the value of a person’s estate goes above £325,000. Homeowners also get a home allowance, called the Residence Nil Rate Band, which could take the total tax-free allowance to £500,000. Couples can pass on any unused allowance to their surviving spouse, potentially taking the tax-free amount up to £1m.

For grandparents wanting to support their grandchildren financially, the first step is to consider what the money could be used for.

For example, will it be used to help with the cost of university, a future home or even retirement? In each case the money will be kept in savings for a different length of time and could influence where it should be saved or invested.

“If you have five to 10 years or more until you need the money, consider investing in stock market funds. Your investment will be at risk, but it does have the potential to grow faster than cash over the long-term,” says Sarah Coles, a personal finance analyst at Hargreaves Lansdown.

Junior Isas

A popular way for parents to save for their children, junior Isas can be used by grandparents, too.

Only parents can open a Junior Isa for their child, but grandparents and other family members can pay up to a total of £9,000 into the account each year. The money is locked away until a child’s 18th birthday, at which point the child will receive full control of the money.

There are two forms of junior Isas – cash or investment. In a poll of 2,000 grandparents by investment firm Killik & Co, 15 per cent said they were paying into a Junior Isa.

“If you’re saving for your grandchild’s long-term future, opening a junior Isa is one of the safest options. Money saved in a junior Isa is locked away until the child turns 18 and is tax-free up to the current limit of £9,000 per year,’ says Adam Bullock, UK director at consumer website TopCashback. “Plus, for all the time that the money is tucked away, it’ll be earning interest – meaning more for your grandchild.”

Setting up a trust

For grandparents who want to retain some control over how and when their gifted money is used, a trust structure could be worth considering.

The simplest version is a bare trust, which can be opened and managed by a grandparent on behalf of their grandchild. Assets held in a bare trust are in the name of a trustee – which can be the grandparent or someone else. The named child gets access to any money and assets in the trust at the age of 18 (16 in Scotland), but the trustees can spend the money before then for the benefit of the child – to pay school fees, for example.

In the meantime, any gains made on cash or investments held in the trust are taxed through the child.

As children benefit from the same personal tax allowance of £12,500 and a capital gains allowance of £12,300, there is unlikely to be any tax to pay.

However, this is only the case for grandparents paying in. If a parent pays money into a bare trust and returns go above £100 a year, it will be treated as the parent’s income for tax purposes.

Another option could be a discretionary trust. These give more power to other trustees (for example, parents) over how income and capital in the trust are distributed between the grandchildren.

Unlike bare trusts, the beneficiaries can be changed and future grandchildren can be added. Trusts can be complicated to set up and it is best to seek professional advice.

Natasha Burt, from Kent, says her mother is saving for her daughter, Georgina.

My mother, Sandra, has saved almost £600 for my daughter, Georgina, who is 14. She uses a cashback website to earn money when she makes purchases, and all the cashback she earns goes into my daughter’s bank account.

My mum’s not good with the internet so I run the account, through Topcashback, on her behalf. Once the money accumulates we transfer it to my daughter’s current account.

The money has been saved over around five years. My mum does her weekly food shopping through the website and has just ordered two new sofas. Sometimes she only gets a few pence in cashback but it all adds up.

Georgina has access to her bank account, but she doesn’t touch a penny because she knows nanny is saving up for her.

Georgina wants to go backpacking around Europe after doing her A-levels, so the money will be a big contribution to that and will hopefully grow even further by the time she’s 18.

Lifetime Isas

If a grandparent wants to gift money to a family member over the age of 18, they could encourage them to set up a Lifetime Isa (Lisa). Up to £4,000 a year can be paid into a Lisa, and the Government will give a 25 per cent bonus on the savings, taking the total up to £5,000.

It is worth noting that money held in a Lisa has to be used for a house purchase, or to fund retirement from the age of 60. Like other Isas, there are both cash and investment options available.

Other savings products

Grandparents can open a children’s regular savings account through a local bank or building society. They can open an account on behalf of their grandchild, providing they bring along proof of identity – usually a birth certificate.

Halifax’s Kids’ monthly saver, one of the top rates on the market, pays annual interest of 4 per cent on savings between £10 and £100 a month for the first year.

Grandparents can also buy Premium Bonds on behalf of their child or grandchild aged under 16. They can invest from £25 up to £50,000 in total.

Premium Bonds, which operate through NS&I, don’t pay any interest. Instead the bonds are entered into a monthly prize draw for a chance to win tax-free prizes from £25 to £1m. Grandparents look after the bonds until the child turns 16.

Finally, grandparents could set up an account in their own name, making regular savings and then transferring the money over to grandchildren when they like.