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.
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 if the donation is towards the maintenance of a person – so this would be if the grandparent is supporting the grandchild or the parents in terms of their food, clothing, accommodation, medical or education costs. But in order to get an exemption, you would need to prove this to SARS. The exemption does not provide for a grandparent helping to send a child to a private school, for example.
So, if you don’t want to pay tax, the maximum a grandparent could contribute to school fees, irrespective of the number of grandchildren would be R100 000 a year.
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 to earn 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 will apply.
Alternatively, you could bequeath these items in the terms of your will. As the grandchild would be a beneficiary of the estate, donations tax would not apply. If the value of the estate is less than R3.5 million, then no estate duty is paid.
This article first appeared in City Press.
Opening an account in your child’s name takes away from their lifetime limit of R500 000, is it still advisable to do so?
It will use their lifetime limit but if you are starting the investment for them it is better than doing it in your own name with all the tax and donation issues. My view is that by starting early they will benefit from the growth in the investment. We also expect the lifetime limit to be raised over time
Thank you Maya, and can I still deposit R33 000 annually into my TFSA(in my name)
and also R33 000 annually into a TFSA for my child into his account
Yes – that is the great part. You can invest R33 000 for each child.
Yipee this is great thank you once again
I was waiting to ask someone this question and to get the correct answer
Hello Maya,
Thanks for the useful information. Can I also open a TFSA for my child, in his name, who is now 3 years old
Yes you can from the day they are born