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Gifting money to grandchildren

Spoiling the grandkids is one of the great joys of being a grandparent. But what are the rules about financial gifts and tax? Our guide helps to clear up some of the complexities around giving money to your grandchildren.

Spoiling the grandkids is one of the great joys of being a grandparent. But what are the rules about financial gifts and tax? Our guide helps to clear up some of the complexities around giving money to your grandchildren.

Written by
Tim Knighton
Life, health and income protection insurance expert
Last Updated
21 JUNE 2024
13 min read
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Gifting money to grandchildren: key points to know

As a grandparent, you want to know that your grandkids are taken care of and have the best possible chance in life. The money you’ve earned and saved throughout your life could help make their lives better, perhaps by funding higher education or going towards a deposit on their first home.

But what are the rules on gifting money to your grandchildren in the UK? It’s important to understand the financial implications of giving money away to your grandchildren at different times – today, in the near future or after you die.

Here are the key points we’ll be looking at in this guide:

  • Each year, you can gift up to a certain amount tax-free.
  • You can give more than that, but if you die within seven years of making a gift that’s over your annual exemption, these gifts could be subject to inheritance tax. 
  • There are a number of other ways you can gift to your grandchildren tax-free, including naming a grandchild as the beneficiary of a life insurance policy.

You may find it useful to speak to a specialist advisor, who can advise on the tax implications of any financial gifts, for both you and your grandchildren.

How much can I give as tax-free gifts to my grandchildren?

As it stands in 2024, each tax year – which runs from 6 April to the following 5 April – you can gift up to a total of £3,000 free from inheritance tax (IHT), in assets or cash, to loved ones like your children and grandchildren.

This £3,000 can be given to one person or split between several people. Any part of the annual £3,000 exemption that isn’t used in one tax year can be carried over to the following tax year (but no further). Each grandparent has their own £3,000 to give, tax-free.

The gift doesn’t have to be money. It could be stocks and shares, property, furniture, jewellery or antiques. It also includes anything you sell to your grandchildren for less than its market value. For example, if you sell your home to your grandchild for less than it’s worth, the difference in value would count as a gift.

Is £3,000 the maximum I can gift tax-free? 

You can give away more than £3,000 per year – technically, you can give away as much as you like. But if you die within seven years of giving it, any amount that’s over your annual allowance could be subject to inheritance tax. This is known as the ‘seven-year rule’.

After the seven years have passed, there’ll be no inheritance tax to pay, regardless of the value of the gift. That’s why they’re called ‘potentially exempt transfers’.

If you die within seven years of giving the gift, it will be counted as part of your estate – that’s the total value of the property, money, assets and possessions you leave behind.

There could be inheritance tax due if the value of your estate exceeds the IHT threshold of £325,000 – also called the nil rate band (NRB).

How does inheritance tax work with gifts?

Most gifts a person makes during their lifetime are potentially exempt from inheritance tax if the person survives for seven years after giving the gift.

Any inheritance tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the seven years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those seven years will have to pay inheritance tax on their gift.

Gifts use up the inheritance tax allowance first, before any property or assets that form part of your estate. 

For example, say you make one financial gift of £400,000 to your grandchild:

  • If you live for a further seven years, then your gift will be exempt from inheritance tax.
  • However, if you die within seven years, your grandchild will have to pay tax on £75,000 of the gift – that’s £400,000 minus the current (tax year 2024/25) IHT threshold of £325,000.

If inheritance tax is due, the rate your grandchild will have to pay could vary depending on how long ago the gift was made. The amount will be calculated using taper relief.

What is taper relief?

If there’s inheritance tax to pay on the gift, the rate the beneficiary will pay depends on when that gift was given.

As it stands in 2024, inheritance tax is charged at 40% on any gifts valued over £3,000 that are given less than three years before you die. Gifts made three to seven years before your death are taxed on a sliding scale, which is known as ‘taper relief’.

Years between gift and death Tax rate
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

It might be worth getting specialist financial advice on gift-giving if your estate is likely to be larger than the inheritance tax thresholds. As a minimum, make sure that you keep a record of any gifts that you give to relatives.

What are lifetime transfers?

When you give away money from your estate during your lifetime, this is sometimes called a lifetime transfer. There are two main types of lifetime transfer: potentially exempt transfers and chargeable lifetime transfers.

Potentially exempt transfers (PETs)

PETs are gifts that you make within your lifetime that exceed your annual tax-free gift-giving exemption of £3,000. If you live for seven years after making them, they’re tax-free. But if you die within those seven years, they’re called failed PETs and could be subject to IHT.

To qualify as PET, the gift would have to be made from an individual (the grandparent) to another individual (the grandchild) or to a specified trust.

Chargeable lifetime transfers (CLTs)

A CLT is a type of lifetime transfer that doesn’t qualify as potentially exempt. A common example of this would be any payments made into a discretionary trust or gifts made to a company.

Inheritance tax is instantly payable on any CLTs that exceed the £325,000 IHT threshold for the current seven-year period. If the trustees (the grandchildren) pay the tax bill, this will be charged at 20%. But if the person making the transfer (the grandparent) pays, then more tax could be due. And if you die within seven years of making the transfer, then the gift could be subject to a higher rate of tax.

The calculations are complex, so if you’re thinking of setting up a trust for your grandkids and you want to avoid a larger than necessary tax bill, it’s best to seek professional advice.

Will my grandchildren have to pay capital gains tax on gifts?

Possibly, if the gift is a ‘chargeable’ asset that they later sell and make a profit on. Chargeable assets include:

  • Personal possessions worth over £6,000 (except for your car)
  • A property that isn’t their main home
  • Very large homes, or properties that have been let out to others or used for business
  • Shares
  • Business assets.

Any profit your grandkids make by selling an asset you’ve left to them as a gift is classed as a ‘gain’. They’ll pay tax on the gain, not on the full amount they get from the sale. And that’s only if their gains for the year are over their annual allowance. 

For the 2024/25 tax year, the capital gains tax allowance is £3,000.

Imagine you decide to give a valuable family heirloom – for example, a painting – to your grandchild, but a few years down the line they decide to sell it. To work out the gain, they’ll need to find out the market value of the asset at the time of the gift. 

Say, for example, the painting was worth £1,000 when it was gifted but five years later it has increased significantly in value to £10,000. Based on the current tax-free allowance, capital gains tax would be due on £6,000 of the profit (the £9,000 of gain, minus the £3,000 tax-free allowance).

The rate your grandchild will pay depends on the type of gain and whether they pay the basic or higher rate of income tax.  

What does it mean to dispose of an asset?

In terms of Capital Gains Tax (CGT), ‘disposing’ of an asset could mean either:

  • Selling it
  • Giving it away as a gift
  • Swapping it for something else
  • Getting compensation for it (for example, an insurance pay-out).

That means you may need to pay capital gains tax if you decide to gift – or ‘dispose of’ – certain ‘chargeable’ assets to your grandkids: for example, a holiday home. You’ll need to report the disposal to HMRC and pay any applicable tax within 60 days of making the gift.

In the case of a holiday home, you’d pay CGT on any gain that exceeds your tax-free allowance. The gain would be worked out as the current market value of the property, minus what you paid when you bought it.

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

Thankfully, there’s a bunch of different gifts that escape the inheritance tax net.

Sending £250 gifts

You can make as many gifts of £250 as you like, per person each year. These are considered separate from your estate (and won’t be subject to inheritance tax) so long as the recipient is different each time. This is called the ‘small gifts allowance’.

But be aware that one person can only receive up to £3,000 worth of tax-free gifts per tax year. So if you’ve given someone your whole £3,000 annual exemption, any additional gift would instead be classed as a ‘potentially exempt transfer’.

You don’t need to worry about birthday or Christmas presents you’ve paid for from your regular income, as these are exempt from inheritance tax.

And you can give more if your grandchild is getting married or starting a civil partnership.

Wedding presents up to £2,500

In 2024, you can give your grandchild a wedding present of up to £2,500 tax-free and it doesn’t count towards your £3,000 annual exemption. The gift needs to be given before the wedding or civil ceremony, and the wedding must go ahead for it to be exempt from tax. 

Note that if you’re giving your grandkid a tax-free wedding present, you can’t also use the small gift allowance on them in the same year.  

Gifts from surplus income

You can also make regular payments, tax-free, to help with another person’s living costs. These are known as ‘gifts out of income’. To qualify, the payments must:

  • Come out of any surplus from your monthly income after you’ve paid all outgoings
  • Be paid on a regular basis
  • Not impact your own standard of living.

For example, you could use ‘gifts of income’ to contribute to your grandchildren’s (and by extension your children’s) lives by: 

  • Paying for school fees
  • Paying for private tuition
  • Paying nursery fees or for regular childcare
  • Paying for afterschool activities, such as swimming lessons, football coaching, music lessons or drama courses
  • Paying into a savings account for a child under 18
  • Paying your grandchildren’s rent.

You can give one person your full annual tax-free exemption, as well as gifts out of income. However, you can’t give one person both ‘gifts out of income’ and a gift from your ‘small gift allowance’.

How else can I gift money to my grandchildren?

There are other ways you can give financial gifts to your grandchildren, for example:

Paying into a savings account in their name

Although you're not able to open a savings account for your grandchild unless you are a legal guardian, once their parent has set one up, you could make regular payments into a savings account in their name.

For example, in the 2024/25 financial year, you could save up to £9,000 tax-free with a Junior Individual Savings Account (ISA), which your grandchild will be able to access when they turn 18.

Premium bonds

You could also look at buying premium bonds for your grandchild. Your grandchild won’t earn any interest on these savings, but every month they’ll be entered into a draw to win prizes of up to £1 million tax-free.

Contribute to their pension

If you’re particularly prudent, you could even contribute to a pension for your grandchild. Any investments made in a junior pension will be free from inheritance tax, income tax and capital gains tax. Your grandchild’s legal guardian will have to open it, though.

And bear in mind that money in a pension is locked up until they’re aged 55 at the earliest, so they won’t be able to use it for many of life’s big expenses, such as a first home, a car or a wedding.

Top up your own pension

Any money left in your own pension pot when you die can also be passed to your family free from inheritance tax. You might therefore choose to top up your own pension with extra contributions, and benefit from tax relief on top.

Alternatively, you might prefer to spend other money first and preserve your pension for as long as possible. Either way, ask your pension provider for an ‘expression of wish’ or ‘nomination of beneficiaries’ form, so you can specify who you’d like to inherit any unspent pension money.

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

Yes, you can name your grandchild or grandchildren as beneficiaries of a life insurance policy. Bear in mind though, that the insurance provider won’t be able to release their share of the payment to them until they reach their 18th birthday. A guardian will need to be appointed to manage their money until then.

If a life insurance policy is written in trust, any pay-out won’t be counted as part of your estate for inheritance tax purposes. So your grandchildren could benefit if you make them beneficiaries of the policy, without losing a hefty chunk to the tax office. Learn more about how putting a life insurance policy in trust could help your loved ones when you’re not around to support them. 

Top tips to do right now

Rising house prices mean more people now face paying inheritance tax. If your estate is likely to exceed the tax-free allowance, then it may be time to consider your options.

Giving money to your children and grandchildren needs to be done within the rules to avoid them facing a tax liability. So what do you need to think about?

  • Do a quick calculation of everything you own - property, possessions, cars, savings and investments - to see how much inheritance tax you can expect to pay on your estate. A quick check on property websites can give you an idea of how much your home is now worth, for example.
  • If you plan on gifting inheritance over the tax-free threshold of £325,000 (or £500,000 if you're leaving your house to your spouse, partner or children) consider seeking specialist financial, legal and tax advice if you want to avoid 40% of anything over the thresholds going to the governemnt.
  • Take advantage of opportunities for exempt gifts to your children and grandchildren to avoid getting caught by the seven-year rule. It may be best to make gifts at a younger age while you're in good health - but there's still some risk,. Don't forget to factor in potential care costs for your older age in your calculations about what you can afford to give away.
  • Keep a record of financial gifts.
  • Fill in the paperwork for work and private pensions, nominating your beneficiaries.
  • Consider writing your life insurance in a trust, so any pay-out escapes inheritance tax.
  • Make a will to save time, trouble and expense for your loved ones.

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Frequently asked questions

How much can I give away tax-free to my children, compared to my grandchildren?

Parents gifting money to their children have the same annual tax-free gift exemption of £3,000 as grandparents. However, parents can also gift up to £5,000 tax-free on top of that to their child for their wedding or civil ceremony.

That’s the main tax difference between gifting to a grandchild and gifting to a child: grandparents have an inheritance tax-free gift limit of £2,500 for wedding presents.

Also, as a grandparent, you can’t open a savings account or pension for your grandchild – that must be done by the child’s parent or legal guardian. But there’s nothing to stop a grandparent from contributing to a savings account or pension, once it’s open.

What is life insurance in trust and how can it help me avoid paying too much inheritance tax?

If you take out a life insurance policy and put it in trust, that means the pay-out will be kept separate from your estate.

It can be as simple as filling in a form when taking out life insurance. But as a trust is a legal arrangement, it’s a good idea to take advice from a solicitor on whether putting life insurance in trust is right for you and your beneficiaries.

How should I record gifts for inheritance tax purposes?

Keeping a written record of any financial gifts you make will help the executor of your estate to fill out the relevant inheritance tax forms. 

To assist them, make a note of the following whenever you give a financial gift:

  • The date of the gift
  • The name of the recipient and their relationship to you
  • A description of the gift (cash, investments)
  • The value of the gift at the time it’s given
  • The exemption that applies (annual exemption, wedding gift) and any value not covered.

You could also keep a record of any regular ‘gifts out of income’. The executor will need to show that these gifts were indeed made from ‘surplus’ income for them to qualify, so it’s useful to keep a record of your regular income and expenses. 

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Tim Knighton - Life, health and income protection insurance expert

"The fact that over 50s life insurance offers guaranteed acceptance is a huge benefit. You don’t need to worry about passing any health checks and you can make sure your beneficiaries are looked after. Just make sure that you plan for inflation, otherwise you might leave your loved ones short when they need" 

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