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If you are helping your grandchild save, or paying for their education, make sure you don’t end up paying tax
As a grandparent, you may want to start an investment for your grandchild or help with their education costs. While this is an invaluable gift, you need to consider the tax implications thereof.
Donations over R100 000 in any tax year will attract donations tax payable by the donor. This means you can only donate a total of R100 000 a year before paying tax. This includes a contribution to an investment or helping the parents pay for school fees.
According to BDO Wealth Advisers, an exception could apply is if the donation is towards the maintenance of a person – this would be if the grandparent supports the grandchild or the parents in terms of their food, clothing, accommodation, medical or education costs.
But one would need to prove this to the SA Revenue Service for an exemption.
It does not, however, provide for a grandparent helping to send a child to a private school.
In terms of starting an investment account, the same limits would apply, but there are also investment taxes to consider. Any capital gains, dividend or interest income would be taxable when the child starts earning an income.
The best way to avoid these taxes would be to open a tax-free savings account in the grandchild’s name.
Even if you gave your grandchild jewellery or a new car, if the value exceeds R100 000 donations tax would apply.
Alternatively, you could bequeath these items in a will. As the grandchild would be a beneficiary of the estate, donations tax would not apply. If the value of the estate was less than R3.5 million, then no estate duty would be payable either.
