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.

Faith Archer

Insurance expert

minute read

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Posted 19 JANUARY 2022

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 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. 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 advise on the tax implications of any financial gifts, for both you and the potential recipient.

What is inheritance tax?

When we die, all the property, money, assets and possessions we leave behind are known as our estate. Depending on the total value of the estate, inheritance tax may need to be paid to HM Revenue & Customs (HMRC) before anything can be passed on to the beneficiaries of the will. In 2022, 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.

Anything left to your surviving spouse after your death passes free from inheritance tax, including any unused inheritance tax allowances. This means a married couple or civil partners could potentially leave up to £1 million between them to their nearest and dearest, free from inheritance tax.

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 2022, 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 given to one person, or split between 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 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 that gift, it may 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, 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’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 2022, 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 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 else can I gift that’s tax free?

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

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.

Also, each year, you can make as many gifts of £250 as you like per person if you’re feeling particularly generous, 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 potentially getting landed with an inheritance tax bill later.

That is unless they’re getting married or starting a civil partnership. In 2022, 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 (deep breath) 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 your own standard of living.

You could use these regular payments to contribute to your grandchild’s care or to pay for school fees or longed-for activities such as swimming lessons, football coaching or drama courses. 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 Individual Savings Account (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 money in a pension is locked up until retirement age, so they won’t be able to use it for many of life’s big expenses, such as a first home, car or wedding.

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 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 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 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 man. 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 than ever before face paying inheritance tax. However, there are ways of giving money to your children and grandchildren without them being chased by the tax man.

Do a quick calculation of everything you own – property, possessions, cars, savings and investments. If the total is well under the total inheritance tax thresholds of £500,000 for a single person, or £1 million as a married couple or civil partners, you may not need to worry about inheritance tax.
Consider seeking specialist financial advice if you might get clobbered by inheritance tax, to avoid 40% of anything over the thresholds going to the tax man.
Giving stuff away, if you can afford it, is the easiest way to avoid inheritance tax.
Take advantage of opportunities for exempt gifts to your children and grandchildren, to avoid getting caught by the seven-year rule.
Keep a record of financial gifts.
Fill in the paperwork for work and private pensions, nominating your beneficiaries.
Considering writing life insurance in trust, so any pay-out 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 the ones you care about most get a lump sum to take care of bills or mortgage payments, for example. It could take just a few minutes to get a list of quotes from our panel of providers. Why not start a quote today and see if you can find peace of mind?

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Frequently asked questions

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

Possibly. Imagine you decide to give a valuable family heirloom – for example, a painting – to your grandchild. If they sell the painting later and make a profit on the sale, then they may have to pay capital gains tax on the profit – but only if their total gains for that year exceed the tax-free allowance. In the 2021/22 tax year, the capital gains tax 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 more to a child than a grandchild, while still escaping inheritance tax.

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

Also, as a grandparent you can’t 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. It can be as simple as filling in a form when taking out life insurance. However, 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.

Read our guide to putting life insurance in trust for more information.