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.

How to give money to your grandchildren and the best ways to save and invest for their future (1)

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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.

How to give money to your grandchildren and the best ways to save and invest for their future (2)

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.

How to give money to your grandchildren and the best ways to save and invest for their future (3)

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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.


How to give money to your grandchildren and the best ways to save and invest for their future? ›

Make gifts to a custodial account or a trust.

If your grandchildren are very young (and even if they are pretty grown up), it's wise to put the money somewhere for safekeeping to avoid the tragedy of a grandchild squandering funds either intentionally or due to an unwise decision.

What is the best way to pass money to grandchildren? ›

Make gifts to a custodial account or a trust.

If your grandchildren are very young (and even if they are pretty grown up), it's wise to put the money somewhere for safekeeping to avoid the tragedy of a grandchild squandering funds either intentionally or due to an unwise decision.

What is the best savings account for grandparents to save for grandchildren? ›

What is the best savings account for a grandchild?
ProviderAccount nameAccount access
Saffron Building SocietyChildren's Regular SaverBranch / Post
HalifaxKids' Monthly SaverBranch / Online
Saffron Building Society2 Year Children's BondBranch / Post / Telephone
HSBCMySavingsBranch / Telephone
1 more row

What is the best way to invest $1 000 for a grandchild? ›

9 Ways To Invest for Your Grandchildren
  1. Take Out a Certificate of Deposit. ...
  2. Look Into Exchange Traded Funds. ...
  3. Open a High-Yield Savings Account. ...
  4. Invest in Real Estate. ...
  5. Contribute to a Roth IRA. ...
  6. Open a Coverdell Education Savings Account. ...
  7. Invest in Mutual Funds. ...
  8. Buy Stocks.
Feb 21, 2023

What is the best account to save for grandchildren? ›

A child trust fund or a bare trust is a good option if you want to put money towards your grandchild's future without having to forgo any control. When you set up a child trust fund, you name the grandchild in question and also determine who manages that trust. It does not have to be you, but you may want it to be.

Are savings bonds a good investment for grandchildren? ›

‍A long-term gift for a child: Savings bonds can help magnify your financial gift by growing over time. They are a practical monetary gift that can help set a child up for a brighter financial future. ‍No commissions or fees: Savings bonds are purchased from TreasuryDirect rather than through a stockbroker.

How do I gift my grandchildren without paying taxes? ›

Methods for gifting assets to grandchildren

Perhaps the simplest approach to gifting is to give the grandchild an outright gift. You may give each grandchild up to $16,000 a year (in 2022) without having to report the gifts. If you're married, both you and your spouse can make such gifts.

What type of trust is best for grandchildren? ›

A revocable living trust is an excellent estate planning tool for making gifts to grandchildren for several reasons. One important reason is that by using a living trust to hold assets intended for your grandchildren you can appoint someone of your choosing as the Trustee of the trust.

Can I open an investment account for my grandchild? ›

A custodial brokerage account, such as an UTMA or UGMA, is a way to invest for your grandchild without limits on contributions by earned income or how the money can be used.

Can I start a Roth IRA for my grandchild? ›

The key to opening a Roth IRA for your grandchild is earned income. Your grandchild must have a job that earns a wage. That could be a traditional job where taxes are withheld from their paycheck, or it could be wages earned doing odd jobs like babysitting or mowing lawns.

What is the safest way to invest $10,000 dollars? ›

  • Mutual Funds & Exchange-Traded Funds (ETF) ...
  • Real Estate Crowdfunding. ...
  • Real Estate Investment Trusts (REIT) ...
  • Rehabbing & Home Improvements. ...
  • High-Yield Savings Account. ...
  • Start Or Add To An Emergency Fund. ...
  • Self-Directed Brokerage Account. ...
  • U.S. Treasuries.

How do I set up a trust fund for my grandchildren? ›

Establishing a trust

Since trusts for grandchildren are legal structures, you'll work with an attorney to establish them. However, you may also want to discuss wealth planning and investment options with your contacts at Wells Fargo Private Bank before you finalize your plans, Sowell says.

What is the safest investment for $1 million dollars? ›

The safest place to put $1 million dollars would be in a combination of insured bank accounts and conservative investments, such as bonds and CDs, to ensure a balance of liquidity and stability.

Is it better for kids to invest or savings accounts? ›

Investment accounts can help your kid earn interest. Unlike saving, investing entitles your child to grow the money they deposit into a specific investment, something they don't get by keeping their money in a piggy bank.

Should a grandparent open a 529 plan? ›

Because of the way financial aid is determined, it's generally best if the beneficiary's parents own the account. But there's an exception. If you open a 529 account as a grandparent and your grandchild only uses the assets for the last 2 years of college, the 529 assets probably won't impact student aid at all.

How can grandparents help grandchildren financially? ›

Study it together. Establish a savings account at a local financial institution with a grandchild and make a contribution to it. Turn a financial gift into a lesson by going to the store with them to purchase what they want. Talk about the costs and give them opportunities to put some of the gift into their savings.

What is the best way to pass wealth to heirs? ›

The best ways to leave money to heirs
  1. Will. The first is by having a will. ...
  2. Life insurance. The second way is with life insurance. ...
  3. Estate taxes. Estates that are worth a lot of money can also owe estate taxes. ...
  4. Life insurance trusts.

What is the best way to pass an inheritance to a child? ›

One good way is to leave the inheritance in a trust. The trust can be set up with some provisions, such as the inheritance being distributed in chunks over time.

What type of trust is best for the kids? ›

Typically we would recommend a lifetime trust if you have reasons not to fully trust your child with money (or you are concerned about your child's marital situation), but you believe that your grandchildren will be alright handling the funds. A common pot trust.

Is inheritance from a grandparent taxable? ›

In California, there is no state-level estate or inheritance tax. If you are a California resident, you do not need to worry about paying an inheritance tax on the money you inherit from a deceased individual. As of 2023, only six states require an inheritance tax on people who inherit money.

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