How much can I gift to my grandchildren?
The relationship between grandparents and grandchildren is often a treasured part of family life. And with the high cost of education and housing in the UK, it’s only natural that grandparents want to help their grandchildren in any way they can.
A life insurance payout is of course one way of leaving money behind. In this article, we’ll look at how you can enjoy making tax-free gifts to your grandchildren now, and how this compares with gifting assets to your children.
From school fees and university to putting money towards a deposit, gifts of money from grandparents can make a real difference to grandchildren’s lives. And based on the current Inheritance Tax (IHT) exemptions, giving little and often could help you reduce any IHT liability.
So, how much can you gift to your grandchildren tax-free? Each grandparent can gift up to £3,000 in any one tax year, exempt from IHT. If the whole £3,000 is not used in any single tax year, the balance can be carried forward to the next tax year. So if you make no cash gifts in one tax year, you can give away a total of £6,000 in the next tax year. However, any unused allowance is lost if not utilised in the next year. In short it cannot be carried forward to year 3. This annual exemption applies to lifetime gifts.
It’s also possible to make an unlimited number of small £250 gifts in each tax year so long as the recipient is a different person each time. What’s more, there are exemptions of up to £2,500 for gifts made in respect of a grandchild (or great-grandchild’s) wedding or civil partnership; this increases to £5,000 if your own child is tying the knot.
Yes, you can name anyone you like as a life insurance beneficiary, including grandchildren. As with your children, your grandchildren will need to be 18 years-old before they can access the funds from a life insurance payout.
Your grandchildren can be named as life insurance beneficiaries through your estate, or by taking out your over 50s life insurance policy in trust. When you set up a trust, your beneficiaries are unlikely to be liable for IHT if a valid claim is made, as the cash sum is generally not counted as part of your estate.
For more inspiration, read our guide on how to pick a life insurance beneficiary.
Gifting money to adult children
Before you decide how much to gift to your grandchildren, you’ll understandably want to know how this compares to gifting to your adult offspring.
As with gifting to grandchildren, you can give away up to £3,000 worth of gifts tax-free to your children in a single tax year. This is known as your annual exemption. Technically, you can gift as much money to your children or other family members as you like, but in order for your gifting (above £3,000) to be Inheritance Tax-free, you would need to live for at least seven years from the date the gift is made. This is what is known as the seven year rule for gifts – officially known as a Potentially Exempt Transfer (PET) – which we’ll cover in more detail later. Note that there may still be Capital Gains Tax due when gifting money to children.
How Inheritance Tax works with gifts
Lifetime transfers
Once your total chargeable lifetime transfers in the last seven years has exceeded the IHT threshold of £325,000, tax will become payable at the lifetime rate of 20%.
Tax is charged on the ‘transferor’, which in this case could be the grandparents, but it can also be paid by the transferee (the grandchildren). The amount of tax paid can be affected by who pays the tax.
Tax is due six months after the end of the month in which the transfer is made, or for a transfer made after 5 April and before 1 October in any year, the due date is the end of April in the next tax year.
Potentially Exempt Transfer
A Potentially Exempt Transfer (PET) enables an individual to make gifts of unlimited value which will become exempt from IHT if the individual survives for a period of seven years. If this doesn’t happen, the PET becomes a Chargeable Consideration, and is added to the value of your estate for IHT. If the combined value is more than the IHT threshold, IHT may be due.
If the person gifting the money (known as the donor) dies within seven years from the date of the PET, it becomes retrospectively chargeable. In this case, tax will be chargeable on the value of the PET at the date it was actually made, based on the donor’s seven year cumulation (at that date) but using the death rates in force at the date of death, subject to a taper relief.
Taper relief reduces the tax on lifetime gifts if the donor survives at least 3 years.
It works on a sliding scale from years three to seven, which means that by the seventh year there is usually no inheritance tax to pay – but the relief only applies to the value of gifts over the Inheritance Tax nil rate band
In the context of a Potentially Exempt Transfer, the taper means that if the donor survives for at least three years, only a reduced percentage of the full death rates will be used as follows:
| Years between gift and death | Percentage of full charge at death rates |
|---|---|
| 0-3 | 100% |
| 3-4 | 80% |
| 4-5 | 60% |
| 5-6 | 40% |
Although the taper relief reduces the amount of tax payable, it does not reduce the value of the transfer for the purposes of the donor’s cumulation. The full value of the transfer is included in the donor’s cumulation for the purposes of working out the death tax on the estate.
The current nil-rate band is £325,000. IHT is charged at a rate of 40% on the chargeable value of an estate (above the nil-rate band) after taking into account the value of any chargeable lifetime transfers.
It’s important to remember that taper relief does not reduce the value of the gift transferred - it only reduces the tax payable.
Tax allowances on leaving property to children
If you leave a property to your children or grandchildren, your tax-free threshold can rise to £500,000 if your estate is worth less than £2 million. Find out more about Inheritance Tax property gifts on GOV.UK.
Gifting from surplus income
If you have enough income to maintain your usual standard of living, and do not have to fall back on any capital investments such as bonds, you may wish to consider making gifts from your surplus income. These gifts out of surplus income could include:
- Regularly paying into a grandchild’s savings account
- Paying towards your grandchildren’s school fees (or paying in full)
- Paying regular money towards other costs, such as grandchildren’s hobbies and activities.
How to qualify for IHT exemptions
To qualify for exemptions within IHT limits, it’s very important that you keep good records of the gifts you make to your family. If you don’t, there is a chance that IHT may be due on these gifts when you die.
The rules for IHT gift exemptions are complex; for example, these gifts must be regular, so you need to be committed to keeping up regular payments for these gifts. Here are some other golden rules:
- The gifts must be made out of your income.
- They must form a part of your ‘normal expenditure’.
- The payments should not have any impact on your own standard of living.
IHT exemptions on gifts made out of normal expenditure
After your death, the executors of your estate will need to complete the table on HMRC’s ‘Gifts and other transfers of value’ (IHT 403) form. It is designed to show HMRC your net income versus your net expenditure for the year in which your executors claim you made the regular gift. It will also confirm if there was any surplus income available.
It can be really difficult for the executors to document this information unless you keep a record of it yourself. This is why it’s especially important to keep accurate records of regular gifting so that your loved ones can make use of this IHT exemption. The rules around this exemption are complicated, so we would strongly recommend that you seek financial advice.
Other options could include contributing to a Junior ISA (Independent Savings Account) for your grandchild. While you can’t set this up unless you have parental duties, you can contribute after the account has been opened. These tax-free savings accounts have an annual limit of up to £9,000 (2024-25 tax-year). It is possible to invest in cash or stocks and shares with a Junior ISA, which your grandchild can access on their 18th birthday.
Another option would be to contribute £2,880 to a pension. The child will benefit from 20% tax relief on top of this, taking the total to £3,600 a year into their child's pension, which can take the form of a self-invested personal pension (Sipp), or a stakeholder pension, among other types.
The disadvantage is that the money will be tied up until the child is in their late fifties. While having a nest egg ready for retirement may be a prudent measure, it could prove frustrating having a pension pot that can only be accessed at retirement when in most cases there may be a clear need for the funds earlier in life e.g. to get their foot on the property ladder, start a business, go travelling, buy a car or pay off a student loan.
You should always speak to a professional if you need more information or help in making a decision.
Find out more about our Over 50 Life Insurance
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