Following on from this theme of grandparents giving money to the younger generations, I discovered another interesting tax breaky thing last week.
Alongside the pension contributions, grandparents can also give away up to £3,000 a year per person, with some extra in the tax year the grandchild gets married.
This is pretty interesting, amplified significantly when you know that if they’re new to gifting they can give £12,000.
So yes, this assumes they are reasonably wealthy, and pretty generous.
But imagine if they are, and are also not that old.
It then comes down to what happens to that £12,000 (and subsequent £3,000s).
Which is why I’m not a fan of Junior ISAs, as for all you know they’re going to hit 18, be handed the money, and blow it on a flash car and down the pub.
If however you can teach them financial literacy through their teens, then consider the following.
The property company I work with buy single-let houses (portfolios of them from retiring landlords wherever possible).
We aim to get these at a discount, refurbish the properties to bring them up to a better standard, and then re-mortgage and rent out.
Upon re-mortgage, sometimes we need to leave some money in.
We could do this ourselves, but instead we look for private investors looking to get a double digit return on their money – without needing to be landlords themselves.
If said generous grandparent gave the grandchild £12,000 and they invested it at 10%, and gave another £3,000 each year which achieved the same…
Then by the time the grandchild hit 18 they would be sitting on a pot worth £200,517.
Sounds a lot better than offering to buy them a car for £12,000 and taking them on holiday once a year doesn’t it (what other grandparents would possibly think of doing in those years leading up, and on the day).
Obviously the super smart financially literate 18-year-old then thinks wow, that’s pretty rad, I’m going to just leave that to compound (re-investing, not taking the interest out) at 10% per annum (assuming the grandparents decide they’ve done enough at this point and don’t keep contributing £3,000 a year).
He/she then goes off for a spin on their hoverboard (maybe).
The compounding at 10% per annum is going to be possible because the properties that the money is sat in are still being rented out, and that rental income will keep coming in month after month.
But the super smart financially literate 18-year-old doesn’t fancy working until they’re 90, they would rather retire at 50.
Just leaving that money to keep compounding at 10% per annum, with no extra funds added after they hit 18 – means on their fiftieth birthday it’s worth:
Now this assumes you can continue to find properties or something else to earn 10% per annum.
And it also assumes resisting the urge to spend the interest each year (or worse, the capital).
And finally, that inflation doesn’t mean the £4m and change only buys you a month’s worth of food by 2070.
But hopefully you get the gist.
If you know of someone who is building up a property portfolio, it might be worth asking them if they’re ever looking for investors to provide the money left in.
Oh, and make sure your kids are super nice to their grandparents.
All the best,
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