Gifting money to grandchildren

Our guide helps to clear up some of the complexities around giving financial gifts to your grandchildren.

Our guide helps to clear up some of the complexities around giving financial gifts to your grandchildren.

Kamran Altaf
From the Life team
minute read
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Posted 4 DECEMBER 2019

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

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
  • The main differences between gifting to a child and gifting to a grandchild
  • How a grandchild can be named as the beneficiary of a life insurance policy

What is inheritance tax?

Inheritance tax is a tax paid by a person who inherits property or money (collectively known as a deceased’s estate). The inheritance tax rate is 40% and it has be paid on any part of the estate that’s over the current threshold of £325,000. 

How inheritance tax is linked to gift-giving

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 your grandchildren without paying any inheritance tax on it. If you gift more than £3,000, you'll pay inheritance tax only if you die within seven years of giving. So, in summary, if you survive more than seven years (or your gifts are worth less than £3,000 a year), the gifts will be free from tax. That's because they aren’t counted as part of your estate.

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 paid
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 which 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.

What else can I gift that’s tax free?

Each year you can make gifts of £250, 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.

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. The gift needs to be given before the wedding or civil ceremony, and the wedding has to go ahead for it to be exempt from tax.

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

Your grandchild can be named as the beneficiary of a life insurance policy

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 continue to meet their mortgage payments. 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?

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