Standard Life International suggests sending Granny offshore for Grandparents' Day

22nd September is Grandparents' Day, a day for celebrating the important role grandparents play in society and the special relationship they have with their grandchildren.

Grandparents may often wish to help their grandchildren with the financial demands of the modern world.

The cost of school education, university fees, getting onto the housing ladder, or even the cost of weddings, are all events which may lead grandparents to consider how they could provide some form of financial support for their grandchildren.

This aim is frequently combined with the desire to reduce their inheritance tax (IHT) liability.

One way of achieving both goals is by making gifts to their grandchildren via a trust, called a Gift Plan.

The full IHT saving would only be made once the grandparents had survived the gift by seven years.

Any growth on the investment in the trust is however outside the grandparents' estates immediately.

The gift could either be a one-off gift of capital or regular gifts from income, since the Gift Plan is flexible enough to accept both.

Alternatively, a Discounted Gift Plan could allow the grandparents access to fixed withdrawals whilst then allowing the beneficiaries access once the grandparents have passed away.

Commenting, Julie Hutchison, Estate Planning Specialist for Standard Life Assurance Limited said, "It is not always possible for grandparents to pass on capital during their lifetimes as they rely on the income generated from their investments to maintain a reasonable standard of living".

"This means that it is not until the death of the grandparents that the money is gifted to the grandchildren, by which time it may have been substantially reduced by IHT.

Not a desirable result for most people." Julie continued, "Another option would be for grandparents to invest some assets into an offshore Discounted Gift Plan for the benefit of their grandchildren".

"By doing so, an immediate reduction in IHT could be achieved whilst still allowing the grandparents to retain a fixed level of withdrawals for their lifetimes, or until the fund is exhausted." Concluding, Julie said, "During the grandparents' lifetime, the capital cannot be paid out to the grandchildren".

"However, because of the potential savings in IHT, the ultimate fund available to them may well be greater".

"Additionally, due to the offshore investment contract used, it may be possible that any gains achieved on the investment are only subject to income tax at 10%, 20%, or even not taxed at all." Example Mr and Mrs Rodgers, both aged 65, have a combined estate of £800,000 mainly comprised of their home, but also investments totalling £300,000.

They are currently in good health, but are concerned about their future IHT liability.

For income purposes, Mr Rodgers receives a company pension which supplements their State pension and the interest and dividends from their investments.

Their family consists of two children and four grandchildren.

It is Mr and Mrs Rodgers' desire that they would like to give their grandchildren a good start in life.

However, their dilemma is that at their current ages they are reluctant to gift away capital as they require the income from these investments to top-up their pension.

A solution is to invest £100,000 of their investments into an offshore Discounted Gift Plan which provides them with: a known level of withdrawals from the investment during their lifetime; potential for an immediate reduction in their IHT liability; their investment being held within a trust managed by trustees whom they appoint; the ability for the trustees to assign the policy to the grandchildren, after the grandparents pass away.

Subsequent encashments would then be taxed at the grandchildrens' income tax rates, which can result in a 10%, 20% or even nil tax on any investment gains.

Back to top