Saving Money for Your Grandchildren

If you have grandchildren it's useful to have information about their financial status as you may wish to build some savings for them for the future. It's particularly important if you happen to be a grandparent carer for the children. Therefore, it's good to know that while for adults' savings accounts tax is deducted on the interest before it's paid, this is not the case for savings accounts specific to children.

Children have a personal allowance (£7,475 for the tax year 2011 to 2012) and do not have to pay tax as long as their annual income is below this amount. They can receive interest without having the tax deducted as long as their parent or guardian fills out Form R85 for each account. They can also claim back any tax that they have wrongly paid. To do this, parents or guardians make a separate claim to HM Revenue & Customs (HMRC) using Form R40. Children under 16 cannot fill out Form R85 themselves.

If your grandchildren's income is above the personal allowance they can't claim to receive savings interest tax-free. However, they will be able to reclaim some tax due to not having used the starting rate (10 per cent) limit for savings only and this is up to £2,440 over the personal allowance.

The good news for grandparents who wish to put away savings for their grandchildren is that, unlike parents and step-parents, they are not liable to pay the tax if the child's income exceeds £100 a year. You, as grandparents, can give as much money as you like to your grandchild and it won't be taxed as your own income.

However, the grandchildren may have to pay inheritance tax on the money they receive and also have to pay interest from the income from their savings.

You may give your grandchildren or great grandchildren cash or gifts for their wedding or civil partnership ceremony. You have to promise the gift or actually make it on or shortly before the date of the ceremony. You may give cash or gifts worth up to £2,500. The exemption won't apply if either the ceremony is called off or you make the gift after the ceremony without having made a prior promise.

Ways to help build savings for your grandchildren:

You can place money into your grandchildren's Child Trust Fund, which has a limit of £1,200 a year. It is a long-term tax free savings account available for children born between 1st September 2002 and 2nd January 2011.

Another way to boost your grandchildren's savings is to open or add to an NS&I Children's Bonus Bond from National Savings and Investments, which is backed by HM Treasury and therefore offers good security. These provide tax-free interest for children under 16. Providing the money remains untouched for five years it will be eligible for an additional bonus. These bonds are made available in "issues". You can invest any amount from £25 to a maximum of £3000 per issue. Investment is in 5-year fixed terms until the child's 21st birthday. Simply apply at a post office or by post to open a bond for your grandchild. The current issue is Issue 34 and is at a guaranteed compound rate over five years, and an interest rate of 2.5% AER including 5th anniversary bonus.

You can also buy premium bonds for your grandchildren or great grandchildren who are under 16.

Other contributions to your grandchildren's long term savings can be made to a bare trust account, also known as accounts or nominee accounts, which need to be transferred to their own names on reaching 16, so that they can claim interest without having the tax deducted.

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