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A university education is more expensive than ever - the average English graduate will now spend £66,560 over a three-year course and while student loans help, they’re unlikely to cover the whole cost.
It’s therefore hardly any wonder that lots of grandparents are eager to help and ensure their grandchildren don’t end up starting their working life saddled with enormous debt.
Recent research from the Association of Investment Companies found as many as a quarter of respondents said grandparents are contributing to their children’s higher education, up from 14% a decade ago – now at an average of £4,703.
Before we get into the various ways you could help your family, it’s important to consider whether you should.
Kim Uzzell, Director at the Financial Wellbeing Academy, says grandparents should give a lot of thought over how they give grandchildren money.
She advises anyone considering helping financially to question whether they could commit to doing so for all their grandchildren - and to communicate the expectations upfront, such as whether you’re prepared to help with ongoing studies including a Masters or PhD.
“Ask yourself whether you can really afford it, or are you doing it because you feel that you ought to put others before yourself?” she adds.
“Remember, you still have a life of your own that you need to fund, and you don't want to sell yourself short.”
It is, indeed, important to be sure you’ve got enough for your own financial security. Even if you’re in rude health now, it’s always wise to have a contingency fund in case of needs in later life, such as care or home renovations.
And while gifting money to grandchildren will give them a financial head start to adult life, you might also think that they need to learn how to budget and manage their own money.
If you’re worried that giving them support with cash won’t help them learn financial independence, you could suggest that they draw up a budget and show they’re following it in return for the money, or simply have regular, open conversations about spending and saving to help them become more financially literate.
If you’ve looked at your own finances and have decided you can afford to help, there are a variety of things to consider – not least an understanding of the costs your grandchildren will be facing.
Tuition fees in England and Wales are typically £9,250 a year but these can be covered fully by a tuition fee loan - where grandchildren are likely to need most support is with living costs.
Maintenance loans can help. These range from £4,767 to £10,227 a year for students studying outside London (a maximum of £13,348 is available if they study in the UK capital).
However, just how much your grandchild will be eligible to borrow will depend on their parents’ income. They’ll only get the full loan if the household earns less than £25,000 a year, tapering down to almost half that as income goes up.
So, with the average undergraduate spending £1,078 a month in 2024, or £12,936 across the year, on rent, bills, food, course materials and other living costs (including the all-important socialising), maintenance loans are unlikely to go far enough.
To plug the shortfall between their maintenance loan and living costs, students will either have to get a job, spend their own savings or get help from their families.
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There are broadly two ways grandparents can provide financial support for grandchildren: either by putting money into their bank account or by paying providers. For example, if you’re helping with your grandchild’s rent you could pay their landlord or accommodation provider directly.
However, Will Stevens, Head of Financial Planning at wealth manager Killik & Co, says many grandparents like the ease and flexibility of paying their grandchildren directly.
That way, they can then spend the money how they want – particularly if it’s being used to help with day-to-day living costs.
The way one gives money is only part of the story though – there are also other considerations, such as Inheritance Tax, to be aware of.
If your loved ones will likely pay Inheritance Tax on your estate when you die, giving money to your grandchildren while you’re alive could also be a tax-efficient move, by reducing the amount that’s eventually payable on your estate.
Individuals can gift up to £3,000 a year that's free from IHT - this is known as your annual exemption.
This gift can be spread across multiple people or given to one person – if it’s for the benefit of someone at university, this can be a hugely useful amount to receive each year.
If you didn’t use last year’s £3,000, you can carry forward any unused allowance from the previous period.
This means a married couple, who didn’t give away any money last year, could gift as much as £12,000 (both offering £3,000, doubled for the two years’ worth of allowance) without worrying about IHT.
It’s possible to give away larger lump sums, but if your estate will be liable for IHT, you need to be mindful of the seven-year rule.
These gifts are referred to as potentially exempt transfers, or PETs, with the rate of IHT that could be charged gradually reducing over time.
Gifts are only considered to be wholly outside your estate (and therefore free of IHT) if you live for a further seven years after making the gift.
However, IHT rules can be complicated and it’s important to plan your gifts carefully to ensure they’re achieving what you want – if you’re unsure or dealing with large sums, it’s important to get financial advice from a qualified professional.
The IHT threshold is, at the time of writing, £325,000 per individual in the UK with a further allowance of £175,000 if you leave the family home to children or grandchildren.
This means an IHT-exempt amount can reach £1m, as married couples or civil partners can currently give their estate to each other free of IHT, as well as passing on any unused allowance.
If the value of your property, assets and savings outside pensions are above these amounts then 40% Inheritance Tax may apply on the difference.
Stevens says the seven-year gifting rule could influence the timing of your financial support to grandchildren at university.
The quickest way to give money is to send money directly to a bank account and you could consider giving three years’ gifts upfront, rather than paying each year and starting the ‘seven year clock’ each time a new amount is given.
“As long as money being spent is exclusively to the benefit of that individual, including to cover university costs, it is a gift to them. Time here is important. The sooner a gift is made, the sooner a seven-year rule starts on the gift,” adds Stevens.
However, before doing this you’d want to be confident that the money would be managed carefully over the duration of their studies and not frittered away.
Giving a grandchild regular financial support, rather than shelling out lump sums, can also be tax effective if IHT is a concern.
Craig Rickman, Personal Finance Editor at investment platform Interactive Investor, says regular gifting is a lesser-used option, but it could be perfect when funding university costs.
This is because you can give away as much money as you like in regular payments IHT free, so long as it can be demonstrated that you made the gifts regularly, you could afford to make the gifts out of your income and without them impacting your standard of living.
“It’s a handy trick if you want to give money away and have spare retirement income. Giving money regularly also reduces the risk of it being squandered,” he says.
Professional advice from a financial adviser should be sought on this as surplus income would need to be identified and documented, as well as the intention to make regular gifts.
Also consider whether the gifts will be able to be made throughout the entire period of higher education, as the money may have to stop at a critical time for the grandchild’s learning.
Don’t let a generous gift turn into a tax trap for your family – here’s what you need to know.
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