Open up the bank of Gran & Grandad: How to spread your wealth safely

Not everyone in the family will be feeling the financial pressures from Covid-19 – with under 10 per cent of those aged 70 and over saying they have been hit.

Yet almost 40 per cent of people aged 30-59 have been affected, the Office for National Statistics has found.

So how can parents and grandparents help cash-strapped loved ones? Here Money Mail explains how you can spread your wealth without triggering tax traps.

Early legacies

Making a gift of money to children is a generous gesture that could be tax efficient, too.

Inheritance tax is 40 per cent of the value of your estate on death, but only if it’s worth £325,000 or more.

Husbands, wives and civil partners can pass on their main home to each other inheritance tax-free.

If you will your home to children or grandchildren, your estate attracts an extra £175,000 allowance, taking the threshold before tax to £500,000. Couples can combine allowances, meaning a £1 million inheritance tax exemption.

By giving money now, you can lower the value of your estate above the threshold, cutting the tax bill. Yet if you die within seven years of the gift, the cash will still be counted as part of your estate.

However, you can give away up to £3,000 annually free of inheritance tax. You can also make gifts of up to £250 per person a year and make gifts from surplus income.

Rainy day fund

If you trust your family not to squander the cash, you could put it in an easy-access savings account for use in hard times.

The National Savings & Investments (NS&I) Direct Saver pays a top 1 per cent interest rate.

Future-proofing

Helping your family build a pension is a tax-efficient way to help out. Pension contributions made by parents or grandparents are treated as if made by the child. Payments attract tax relief at the same rate they pay tax, not you.

But they won’t get tax relief if contributions top 100 per cent of their salary or £40,000, whichever is less.

Even if a younger family member has lost a job, you can ensure they do not lose valuable tax relief. 

Insulated: Under 10 per cent of those aged 70 and over saying they have suffered financially as a result of the Covid-19 pandemic 

If they are unemployed, you can still pay in up to £2,880 a year and they will receive £3,600 once basic-rate tax relief at 20 per cent is added.

Some pension providers will allow non-policy holders to pay into a private pension account. It is also sometimes possible to pay into a workplace pension account on behalf of someone else.

Equity release

You can unlock cash from your home to pass to family members using equity release if you’re mortgage free and aged 55 or over.

Equity release is a long-term debt repaid at the sale of your home when you die or move into care. 

But this means interest is added to the debt monthly and it can quickly snowball. It is unwise to use it for short-term problems.

The loans now come with a no-negative-equity guarantee so you won’t ever owe more than your home’s value, and some deals let you pay the interest to ensure the debt does not increase.

Cut repayments

Parents and grandparents can still help out family if they do not want to give money away, by using an offset mortgage. 

This type of home loan has a linked but separate savings account. By making savings deposits, you can reduce your child’s mortgage payments.

A mortgage of £150,000 at 3 per cent over 25 years would cost £711 a month. If you put £20,000 in the savings account, the mortgage debt that would attract interest would drop to £130,000.

This would reduce the monthly payment by £95 to £616, saving your child £1,140 a year. You would earn no interest on your savings.

Help to buy

It is possible to help children get on the property ladder with little, or even no deposit, with a family mortgage. 

You must use your savings to guarantee the loan, or allow a mortgage-style restriction to be put against your property. Savings rates range from 0.1 per cent and 1.6 per cent.

The Barclays Family Springboard mortgage offers borrowers up to a 100 per cent mortgage. Parents have to deposit savings equivalent to 10 per cent of the purchase price.

Family Building Society has a 95 per cent deal, with a 20 per cent deposit required from family. Or they can agree to a restriction on their own home, or use an offset account.

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