For many grandparents, the desire to support their grandchildren extends beyond birthdays and holidays. Whether it’s helping with education costs, providing a financial head start, or simply passing on wealth in a thoughtful way, there are a number of tax-efficient strategies to help turn good intentions into a lasting financial legacy.
Junior ISAs: a simple, powerful start
Junior Individual Savings Accounts (JISAs) are one of the most straightforward and tax-efficient ways to invest for a child’s future. Available to UK residents under 18, JISAs allow parents, grandparents, and others to contribute up to £9,000 per tax year, with all income and gains exempt from tax.
Funds are locked in until the child turns 18, at which point they gain full control. It’s important to note that the child has unrestricted access to the funds at this age, which may not align with every family’s expectations. However, the long-term nature of the investment allows for compounding growth and can result in a substantial investment pot by adulthood. JISAs can be held in cash or stocks and shares with the latter typically offering greater growth potential over time.
The JM Finn stock and shares JISA invests in our Adventurous portfolio, our highest risk strategy – and is most suitable for long-term investors who may be able to withstand a higher level of volatility in their portfolio in return for potentially greater returns in the long run. We use this portfolio for JISA investments because it is typically most suited for children with many years left to invest during their adult lives, and for whom emphasis is on growing an investment portfolio over the long term.
For grandparents, contributing to a JISA is a simple way to make regular or lump-sum gifts without triggering immediate tax consequences. It also avoids the complexity of trust structures, making it ideal for those seeking a low-maintenance solution.
Bare trusts: flexibility with a personal touch
For those seeking temporary control over how funds are invested or used, bare trusts offer a flexible alternative. In a bare trust, assets are held by trustees (often the grandparents) for the benefit of a named child noting that the grandchild becomes entitled to the assets at age 18.
Bare trusts are treated as ‘look-through’ structures for tax purposes: income and gains are taxed at the child’s marginal rates, which are often nil or low. This can result in significant tax savings compared to holding the assets in the grandparents’ own names.
Gifts into a bare trust are treated as potentially exempt transfers (PETs) for inheritance tax (IHT) purposes. Provided the donor survives seven years, the value of the gift falls outside their estate. This makes bare trusts a useful tool for reducing IHT exposure while retaining some oversight of the assets while the child is a minor.
Discretionary trusts: flexibility irrespective of age
A discretionary trust can be an excellent way to provide for grandchildren of all ages because it offers flexibility, control, and protection irrespective of age (unlike a bare trust). Trustees have the power to decide when and how much money to distribute, allowing them to tailor support to each grandchild’s needs—such as education, housing, or health—while protecting the assets from being misused, claimed by creditors, or affected by divorce. It also helps manage inheritance tax planning and can safeguard vulnerable beneficiaries by ensuring funds are used responsibly. Overall, it allows grandparents to support future generations while maintaining oversight and adaptability.
Pensions for children: thinking long-term
It may seem counterintuitive to invest in a pension for a child, but the long-term benefits can be substantial. A child’s pension—typically a stakeholder or personal pension—can accept contributions of up to £3,600 gross per year, including basic-rate tax relief. This means if, for example, £2,880 is paid in, £720 is added by HMRC.
The funds are locked away until at least age 55 (rising to 57 in 2028), making this a true long-term investment. However, the combination of tax relief on contributions and decades of compounding growth can result in a surprisingly large pension pot by retirement.
For grandparents with surplus income or capital, contributing to a grandchild’s pension can be a powerful way to build intergenerational wealth while reducing the size of their own taxable estate.
NS&I products: safe, simple, and tax-free
National Savings & Investments (NS&I) products, such as premium bonds, offer another avenue for tax-efficient saving. While premium bonds don’t pay interest, they offer the chance to win tax-free prizes and are backed by HM Treasury, making them a popular choice for cautious savers.
It’s worth noting that, while capital is secure, the real value of premium bonds may erode over time — particularly during periods of high inflation.
Gifting strategies: structuring with care
Gifting is at the heart of many intergenerational planning strategies, but it’s important to structure gifts in a tax-aware way. In addition to the seven-year rule for PETs, grandparents can take advantage of several exemptions:
- Annual exemption: Each individual can gift up to £3,000 per tax year free of Inheritance Tax (IHT). If unused, this allowance can be carried forward one year.
- Small gifts exemption: Gifts of up to £250 per person per year are exempt, provided the recipient hasn’t also received a gift under the annual exemption.
- Regular gifts out of income: If a grandparent has surplus income, they can make regular gifts that are immediately exempt from IHT, provided the payments are habitual and do not reduce their usual standard of living.
For larger gifts however, trusts may be appropriate.
The most suitable strategy will depend on your circumstances, objectives, and the level of control you wish to retain. Speaking with one of our Wealth Planners can help you implement a plan that balances generosity with good governance. Contact marketing@jmfinn.com for further information.
The information provided in this article is of a general nature and is not a substitute for specific advice with regard to your own circumstances. You are recommended to obtain specific advice from a qualified professional before you take any action or refrain from action.
