A guide to gifting money to grandchildren

Spoiling your grandchildren is a natural part of being a grandparent.

With living costs rising significantly, you might be thinking of giving them a large financial gift to help with university costs or getting onto the property ladder.

But, did you know, there are rules and regulations around how much money you can give as a gift each year?

Gifting money to grandchildren – what you need to know

If you’re a grandparent who’s hoping to give your grandchild a financial gift, it might not be as simple as you think.

There are some financial implications you’ll need to be aware of, such as inheritance tax.

Inheritance tax is an amount that's deducted from your payment by HMRC. This applies if the value of your estate exceeds their threshold when you die. This could apply to gifts you give while you’re alive too.

Whether inheritance tax is charged on your gift will depend on:

• How much you give
• When you gave the gift

Reaching out to an expert, such as a tax advisor or solicitor, is wise if you're looking to give large financial gifts to your grandchildren.

We also recommend reading the government website for more information on the tax implications of giving gifts.

How much money can a grandparent gift to a grandchild tax-free in the UK?

In the UK, you can gift up to £3,000 in each tax year free of inheritance tax. The tax year runs from 6^th April – 5^th April the following year.

This is known as your ‘annual exemption’ and it means that this value won’t form part of your estate when you die.

This can be £3,000 to 1 grandchild or £3,000 split between multiple grandchildren.

If you don’t use your annual exemption in a year, you can transfer it over to the following year (but only for 1 year).

It’s possible to gift more than £3,000 per year but there could be tax implications if you die within 7 years of giving the gift.

There are other gift-giving options, including:

• Small gift allowance – you can gift as many gifts as you wish each tax year up to the value of £250 per person. That's as long as you've not used another allowance on the same person. For example, either of the allowances we're about to mention.
• Wedding gifts – each tax year you can give a tax-free gift to someone who's getting married. For grandchildren this is a gift up to £2,500.
• Regular payments/gifts out of income – if you’d like to help you’re a grandchild with living costs, you can make regular payments to them tax-free. There’s no limit on how much you can give as long as you can afford the payments on top of your living costs. You also need to pay it from your regular monthly income.

What is classed as a ‘gift’?

Gifts that could be subject to tax include:

• Money
• Personal items (furniture, antiques, jewellery etc)
• Property
• Stocks and shares (listed on the London Stock Exchange)
• Unlisted shares that have been held for less than 2 years before death

How does inheritance tax work when giving gifts?

In the UK, the ‘7 year rule’ will dictate whether you'll be charged inheritance tax on any gifts you give.

You’ll need to live for 7 years after giving a gift in order for the gift to be tax free.

If you die within 7 years of giving the gift, you'll be charged inheritance tax. The amount of inheritance tax will depend on how many years after giving the gift you die.

If you've given a gift 3 years before you die, you're taxed at 40%. Gifts given 3 – 7 years before your death are taxed on a scale know as ‘taper relief’.

If you gave away more than £325,000 in the 7 years before you die, taper relief might kick in, potentially reducing the tax bill.

Taper relief is as follows:

How else can I give money to my grandchildren?

You could also gift money to your grandchildren in the following ways:

• Contributing to an ISA or savings account – the account will need to be set up by a parent, but you can make contributions to the account once it’s in place.
• From a pension – you could choose to contribute to your grandchild’s pension pot. Again, the account will need to be opened by a parent but once in place you are free to make contributions. These will be free from inheritance tax and capital gains tax.
• In your will – your will allows you to express your wishes for when you’re no longer around. You could choose to name your grandchildren in your will to benefit from money, property or possessions.
• Premium bonds – buying premium bonds for your grandchildren means that each month they’ll be entered into a draw to win a cash prize. This could be up to £1 million tax-free.
• A life insurance pay out –  life insurance provides a lump sum payment if you die during the policy term. You could name your grandchildren as beneficiaries so they benefit from the pay out. You could also write the policy in trust to stop it forming part of your estate, meaning the pay out wouldn’t be subject to inheritance tax.

When making financial gifts its wise to consult a financial advisor, tax advisor or solicitor to discuss your options.

They can also inform you of any legal requirements or tax implications of giving the gift.

Gifting money to grandchildren in summary:

• You can gift up to £3,000 free of tax each tax year. Known as your annual exemption.
• You also have smaller tax-free allowances for small gifts up to £250 per person. Wedding gifts can be up to £2,500 for grandchildren. You can also make regular payments to them for as long as you like.
• There is a ‘7 year rule’ in regards to gifts and inheritance tax. If you live for 7 years after giving the gift, the gift won’t be taxed. If you die within 7 years, then inheritance could be charged.
• there are other ways in which you can give a financial gift, such as buying premium bonds, contributing to an ISA or buying a life insurance policy and naming your grandchildren as the beneficiaries.
• Consider using a solicitor or tax advisor if you are wishing to give large financial gifts to your grandchildren. They can explain how you can do it, as well as any tax implications.