Gifting money to grandchildren

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

Debbie Thompson

Life insurance expert

minute read

Do you know someone who could benefit from this article?

Posted 18 OCTOBER 2021

What do I need to know about gifting money to my grandkids?

As a grandparent, you want to know that your grandchildren are taken care of and have the best possible chance in life. The money you’ve earned and saved throughout your life could go towards making their lives better, perhaps giving them to access higher education or helping save for the 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. In particular, you should understand:

How inheritance tax is linked to gift-giving
What counts as a gift
How you can consider giving gifts to your grandchildren as part of your inheritance-tax planning
How a grandchild can be named as the beneficiary of a life-insurance policy

You may find it useful to speak to a specialist advisor who can help with financial advice and tax planning aspects of any gifts you choose to make for both you and the potential recipient.

What is inheritance tax?

When we die, the property, money, assets and possessions we leave behind in our will are known as our estate. Depending on the total value of the estate, inheritance tax on the estate may need to be paid to HMRC before assets are passed on to the beneficiaries of the will. In 2021, the inheritance tax rate is 40% and it must be paid on any part of the estate that’s over the current threshold of £325,000.

If you own your home and your total estate is valued at less than £2 million, your inheritance tax-free threshold could increase to £500,000, providing you leave your home to your children or grandchildren in your will.

However, it’s not just the gifts we leave in our will that can be subject to inheritance tax. In some cases, the gifts you give to your children and grandchildren while you’re alive could also be subject to inheritance tax after you die.

How inheritance tax is linked to gift-giving

As it stands in 2021, each tax year – which runs from 6 April to the following 5 April – you can gift up to a total of £3,000 in assets or cash to loved ones like your grandchildren without paying any inheritance tax on it. This £3,000 can be gifted to just one person, or it can be split among several people. And 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 market value. So, 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.

You can gift 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 that gift, it may be subject to inheritance tax. This is known as the ‘seven-year rule’. After the seven years have passed, there will 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, the executor of your estate will take it into account as part of your estate. If you’ve given away more than the threshold of £325,000, the beneficiary will have to pay any inheritance tax due.

If there is inheritance tax to pay on the gift, the rate the beneficiary will pay depends on when that gift was given. As it stands in 2021 , 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%

Any part of the annual £3,000 exemption that isn’t used in one tax year can be carried over to the following year. However, this only applies if it’s used in the following tax year; it can’t be carried over any further.

It might be worth talking to a specialist life-insurance advisor for more information on gift giving. As a minimum, make sure that you keep a record of any gifts that you give to relatives.

What else can I gift that’s tax free?

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

Also, each year, you can make as many gifts of £250 as you like per person, and these are considered separate from your estate (and won’t be subject to inheritance tax). However, be aware that one person can only receive £3,000 worth of tax-free gifts. So, while you can give as many small monetary gifts of up to £250 as you want, if you’ve given someone your whole £3,000 annual exemption, that same person can’t be given any more gifts without it being subject to tax.

That is unless they are getting married or starting a civil partnership. In 2021, 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.

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), they must be paid on a regular basis and they must not impact on your own standard of living.

You could use these regular payments to contribute to your grandchild’s care, or to pay for school or after-school activities. Or, once their parent has set one up, you could make a regular payment into a savings account for your grandchild. For example, in the 2021/22 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.

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.

Or, if you’re particularly prudent, you could even contribute to a pension for your grandchild. But bear in mind that they won’t be able to access the funds until they reach retirement age, and many of life’s big expenses come well before that milestone.

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

Yes, you can absolutely 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 taken out in trust, any pay-out you make 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. Learn more about how putting a life-insurance policy in trust could help your loved ones even if you’re not around to support them.

Comparing life insurance

If you die with a life-insurance policy in place, it could mean the ones you care about most get a lump-sum to take care of bills or to continue to meet their mortgage payments, for example. It could take just a few minutes to get a list of quotes from our panel of providers. So, why not start a quote today and see if you can find peace of mind?

Compare life insurance

Frequently asked questions

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

Imagine you decide to give a valuable family heirloom – for example, a painting – to your grandchild. If they sell the painting at a later date and they make a profit on the sale, then they may have to pay capital gains tax on the profit they make – but only if their total gains for that year exceed the tax-free allowance. In the 2021/22 tax year, that allowance was set at £12,300.

What is the main difference between gifting to a grandchild and gifting to a child?

When it comes to weddings or civil ceremonies , you’re allowed to give gifts worth up to £2,500 to a grandchild or great-grandchild in a year (on top of your annual exemption). That figure increases to £5,000 if it’s your child.

It’s also not possible to open a savings account for your grandchild – that must be done by the child’s parent or legal guardian. But there’s nothing to stop you from contributing to that savings account, 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. As a trust is a legal arrangement, it’s a good idea to take advice from a solicitor on whether life insurance in trust is right for you and your beneficiaries. Read our guide to putting life insurance in trust for more information.