60-second summary
Key points of taking care of your grandchildren financially:
Gifting assets when you’re still alive could reduce the amount of inheritance tax to be paid on your estate.
In each tax year, you can gift up to £3,000 tax-free in total without it being added to the value of your estate – what’s known as your ‘annual exemption’.
If you die within seven years of giving a gift that’s more than your annual exemption, it could be subject to inheritance tax.
Other ways you can gift to your grandchildren tax-free include £250 small gifts and regular payments to help with living costs.
The rules around inheritance tax and gifts can be complex, so it’s best to seek professional advice on financial planning.
How much can I give as tax-free gifts to my grandchildren?
In each tax year you can gift up to £3,000 free from inheritance tax (IHT), in assets or cash. This £3,000 total can go entirely to a grandchild or be split between grandchildren and any other beneficiaries. For example, if you gifted your daughter £2,000 you would only have £1,000 left to gift anyone else such as your grandchildren.
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 the gift, 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 such gifts are 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. And 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?
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.
See a more comprehensive explanation of the gifting rules that apply on inheritance tax on GOV.UK.
If you are considering making a gift, you might find it useful to talk to a legal or tax advisor.
Will my grandchildren have to pay capital gains tax (CGT) 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.
Let’s look at an example for the 2025/26 tax year, when the capital gains tax allowance is £3,000.
Imagine you 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, ‘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 payout).
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.
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 small gifts of up to £250 to as many people as you like in each tax year. However, you can’t give each person more than one of these gifts or combine the £250 with another allowance. For example, you can’t give your grandchild your £3,000 annual allowance plus a £250 small gift.
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.
Wedding presents up to £2,500
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 after-school activities, such as swimming lessons, football coaching, music lessons or drama courses
Paying your grandchild’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
You could make regular payments into a savings account in your grandchild’s name once it’s been set up by a parent or legal guardian.
For example, in the 2025/26 financial year, you could save up to £9,000 tax-free with a Junior 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 on their behalf though.
The money will be locked away until they reach at least the minimum pension age (rising to 57 in 2028). That means they wouldn’t be able to use it for many of life’s big expenses, such as a first home, car or 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 payout 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 tax. 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 children or grandchildren) consider seeking specialist financial, legal and tax advice if you want to avoid 40% of anything over the threshold going to the government.
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 when you’re likely to be at your healthiest – though of course there’s always some risk. Don’t forget to factor in potential care costs for your older age when calculating what you could 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 payout escapes inheritance tax.
Make a will to save time, trouble and expense for your loved ones.
Comparing life insurance
If you die with a life insurance policy in place, it could mean your loved ones get a lump sum to take care of bills or mortgage payments. It could take just a few minutes to get a list of quotes from our panel of providers.
FAQs
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.
Grandparents have a tax-free gift limit of £2,500 for wedding presents.
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 payout 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.
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, etc)
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.

For over 20 years, Tim’s been building and managing relationships with big brands for the benefit of customers. As our expert on all things life, health and income protection, he’s working hard to find the right products that look after you and those you love most.
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