MORE than two thirds of Scottish grandparents have given or plan to give a financial gift to a grandchild, according to a survey by Saga Money.

The average amount donated in Scotland by the so-called Bank of Gran and Grandad is £8,440 and 43 per cent of grandparents do not specify how the money should be spent. Others give money to fund their grandchildren’s education (23 per cent), to pay for holidays (21 per cent), driving lessons (15 per cent) or a deposit on a first home (7 per cent).

Alex Edmans, head of product at Saga Money, said: “Most of the money grandparents are gifting is coming from their cash savings, so whatever small amount of interest they are missing out on is clearly outweighed by the joy they get by seeing their grandchildren benefiting from the money.”

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More than half (56 per cent) of grandparents want their grandchildren to enjoy the money now rather than wait until they inherit the cash.

Patrick Connolly, certified financial planner at Chase de Vere, an independent financial adviser, said: "The role of grandparents has become even more important over the years with many parents struggling to pay property and general living costs."

But there are tax implications from making financial gifts. As Mr Connolly said: "Many grandparents will be concerned with estate planning and looking at how they can pass assets to their grandchildren tax efficiently."

Inheritance tax of 40 per cent is normally due on the value of your estate above the nil rate band of £325,000. Giving money away to grandchildren can therefore be an effective way of reducing the value of your estate so that no IHT is payable. But there are restrictions. Gifts can still count towards your estate for inheritance tax purposes if you die within seven years. So, if you gave your grandchild £10,000 and died four years later, the money could still be included in the value of your estate for the calculation of IHT. The rate of tax depends on when the gift was made as so-called potentially exempt transfers are taxed on a sliding scale.

If you survive for seven years or more after the gift is made, it is exempt from IHT. There are also several other exemptions. You can gift up to £250 to as many people as you want every year, without having to worry about IHT or the seven-year rule. You also have a £3,000 annual exemption. You cannot give both the £250 and £3,000 to the same person, but you can carry forward any unused annual exemption for one year.

HMRC also allows you to make regular gifts from your surplus income as long as they do not affect your normal standard of living. Grandparents can also give a wedding or civil ceremony gift to a grandchild of up to £2,500, which is fully exempt from IHT.

The taxman insists that a gift is really a gift. Mr Connolly said: "It has to be an outright gift from which you can no longer benefit."

For example, you are likely to fall foul of HMRC if you give your house to your grandchild but continue to live in it rent free. The authorities also take a dim view of people who deliberately give away assets in order to qualify for certain benefits or for care home funding.

If you do not want to give cash directly to your grandchildren, you might want to set up a savings account in their parent’s name. The seven-year rule applies, but you do not have to worry about the £100 rule. If a parent gives a child money, any interest above £100 is taxed as the parent’s own rate. However, the £100 limit does not apply to grandparents.

Premium bonds are also popular. Danny Cox, chartered financial planner at Hargreaves Lansdown, a financial adviser, said: "Premium bonds are a good alternative for grandparents who want capital security and like the idea of tax free cash prizes."

Grandparents cannot open a Junior Isa for a grandchild, but they can contribute up to the annual limit of £4,128 for the current tax year. The money can be invested in cash, shares or both and all gains are tax free. The child also cannot touch the money until the age of 18. Again, the seven-year rule applies.

Most advisers recommend shares over cash, especially over a longer period.

Mr Cox said: "If there are more than five years until your grandchild reaches 18, a stocks and shares Junior ISA offers the prospect of higher returns than cash, although there will be downs and ups along the way."