Gifting money to grandchildren

As a grandparent, it's only natural you'll want to spoil your grandchildren and give them the best start in life. This might involve gifting them some money to put towards their higher education or a deposit on their first home.

If you're in a position to gift your grandchildren money, you might be wondering how to go about it and what the rules are regarding gifted money and taxes? Keep reading to find out everything you need to know.

How much money can I gift to my grandchildren tax-free?

From 2023, each tax year from 6th April up until the following 5th April, you can gift your children or grandchildren a total of £3,000 tax-free in cash or assets.

This can be given to one individual or split between several people, and if any part of your £3,000 isn't used in one year, it can be carried over to the next tax year. Each grandparent has their own £3,000 tax-free money to gift.

What are the tax implications of gifting money to grandchildren?

It’s important to understand the financial implications when gifting your grandchildren money, especially if you're doing so at different times e.g. today, in the near future, or waiting until you pass away.

If you're gifting a large sum of money, your grandchildren may have to be pay a hefty inheritance tax bill.

What is inheritance tax?

Inheritance tax is an amount that may need to be paid to HM Revenue & Customs (HMRC) depending on the value of your estate when you die. Your estate is the collective total value of your property, money, assets and possessions.

If any part of your estate is over the current threshold of £325,000, then you'll be charged inheritance tax, which is currently 40%.

However, if you own your home and your total estate is less than £2 million, then the threshold increases to £500,000, providing you leave your home to your children or grandchildren in your will. You will not be required to pay inheritance tax on anything you leave to a surviving spouse or civil partner.

In some cases, any money you gift to your grandchildren while you're alive could also be subject to inheritance tax once you've passed away. If you die within seven years of giving the maximum tax-free gift of £3,000 per year, it may be subject to inheritance tax.

The executor of your estate will take any money you've gifted into consideration as part of your estate. If it's over the threshold, your loved ones will have to pay inheritance tax.

It's highly recommended that you speak with a financial advisor who specialises in inheritance tax, as they can guide you through the process of gifting money to your grandchildren.

Can I specify what the gifted money should be used for?

If you're gifting money, you can suggest to the recipient what you would like them to spend it on, e.g. a house deposit, car, etc. But ultimately, it's their decision what they do with the cash once you've given it to them.

What are the best ways to gift large sums of money to grandchildren?

There are various ways you can gift money to your grandchildren, including:

• Make regular payments to a Junior Individual Savings Account (ISA): you can't open a savings account for your grandchild unless you're their legal guardian, but you can send regular payments, helping your grandchild save up to £9,000 per year tax-free until they turn 18

• Buy premium bonds: you can set up premium bonds in your grandchild's name and each month they'll be entered into a prize draw to win prizes up to £1 million tax-free, but they won't earn any interest in savings

• Contribute to their pension: grandparents can contribute to a child’s pension to a maximum of £2,880 a year, which the government tops up to £3,600 with the 20% tax relief. It's worth noting your grandchild won't be able to access their pension until retirement age, so they won't be able to use it for any big life events such as buying a house or paying for a wedding, but this is an option to consider

• Expression of wish: this is also known as 'nomination of beneficiaries' and it's where you can choose to pass on any money left in your pension pot to family when you die, which will be free from inheritance tax

Are there different rules for gifting money to minor grandchildren versus adult grandchildren?

You can gift your grandchildren money at any point during their lives by giving it to them in cash or transferring money into their account. However, there may be different rules with junior bank accounts regarding how much you can pay in per month, plus other restrictions.

How does gifting money affect my estate and inheritance tax?

You or your loved ones might have to pay inheritance tax on some of the money you've gifted. This depends on two main factors:

• The total value of the gifted money

• When the gift was given

If you give away up to £3,000 per tax year, this is known as your 'annual exemption' and won't be added to the value of your estate. However, if you die within seven years of giving away the maximum tax-free gift amount, it may be subject to inheritance tax.

This is called the seven-year rule. After seven years, there'll be no inheritance tax to pay, regardless of the gift value amount. These are known as potentially exempt transfers.

If you die within seven years of giving the gifted money to your grandchildren, the executor of your estate will take this into consideration as part of your estate. If you've given away more than the threshold amount of £325,000, then your grandchildren or other beneficiaries will have to pay inheritance tax.

Should you die within the seven years of gifting money, the amount of inheritance tax due depends on when you gifted the money.

Gifts given in the three years before your death are taxed at 40%, while gifted money given three to seven years before your death are taxed on a sliding scale known as ‘taper relief’.

As of 2023, here are the taper relief tax rates to be paid on gifted money:

*Information provided by GOV.UK.

Can I still gift money if I'm receiving benefits or care?

You can still gift money if you're receiving benefits or care. However, you must not deliberately do this in an attempt to avoid any charges or reduce the amount you would have had to otherwise pay full price for.

This is known as deprivation of assets, and could result in you receiving less funding. If you've gifted money before making a benefits claim, the Department for Work and Pensions (DWP) will look at when you made these transactions. They will also ask for evidence to suggest that gifting money was genuine.

What is a 'potentially exempt transfer' and how does it work?

After seven years have passed, there is no tax to pay, regardless of how much money your grandchildren have received as a gift. These are known as 'potentially exempt transfers'.

Can I set up a trust for my grandchildren's future?

Yes, if you feel like your grandchildren are currently too young to receive a large sum of money, you can set up a trust. This allows you to choose an appropriate age for them to access this instead.

There are various types of trusts available, each with their own tax implications. Find out everything you need to know in our guide about trusts and life insurance.

What happens if I need the money back after gifting it?

Once you've gifted the money to your grandchildren, it is legally theirs to keep. You could ask for it back if you really need it and they still have it, but there is no obligation for them to give it you back.

What else can I gift to family members tax-free?

There are many options when it comes to giving your grandchildren tax-free gifts. As of 2023, you can gift your grandchild a wedding present of up to £2,500 tax-free and it doesn't count towards your £3,000 limit. This needs to be gifted prior to the wedding, and the wedding must go ahead for it to be tax exempt.

You can also make regular payments to help with another person's living costs, which is called 'gifts out of income'. These must be paid on a regular basis, have no impact on your own standard of living.

These could contribute to your grandchild's care or pay for extra curricular activities such as football coaching, music or drama classes, or swimming lessons.

You can also gift stocks and shares, property, furniture, jewellery, or antiques. This includes anything you sell to your grandchildren for less than market value e.g. if you sell your home for less than its worth, then the difference in value counts as a gift.

Can I name my grandchild as the beneficiary of a life insurance policy?

Yes you can name your grandchild or grandchildren as beneficiaries on your life insurance policy. However, they won't be able to access their share of the payment until they're 18 years old, so a guardian will need to be appointed to manage their money until this age if they're younger.

Writing your life insurance policy in trust means any payout your beneficiaries receive won't be counted as part of your estate, so your grandchildren won't have to pay any inheritance tax. Find out more about taking out life insurance policies in trust and tax to see if it's the best option for you and your family.

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