Research by One Family in 2019 revealed that 45% of inheritances were bypassing a generation, going straight to the grandchildren. More recently, a survey by Saga highlighted that nearly a third of grandparents have assisted their grandchildren through monetary loans or gifts.
The growing wealth gap between younger and older generations has contributed to this increase in these ‘living’ inheritances, where grandparents are opting to give more of their money away while they’re still alive. So, if you’re thinking about gifting money to your grandchildren, you’re part of a growing trend. Perhaps that’s not surprising given the pleasure of helping younger members of your family financially, if you can afford to do so.
If I make a financial gift, will the recipient need to pay tax?
No, but the recipient may be subject to inheritance tax charges if you give them more than the specified allowances (outlined below) and you die within seven years of making the gift (known as the seven-year rule).
As long as you stay within the allowances, you can gift money to your children and grandchildren without the concern of them receiving a tax bill should you pass away within seven years.
What are the tax-free allowances when it comes to gifting money?
When gifting money to other people during your lifetime, there are several allowances to be aware of. Some of these are specific to your children and grandchildren. Any gifts you make outside of these allowances will be considered Potentially Exempt Transfers (PETs), which you can read about below.
The allowances are as follows:
– Annual Allowance
Every tax year, you can gift up to £3,000 without incurring tax (this could be the full amount to one person, or the total amount to a number of people). If you don’t use this allowance in any one tax year, you could gift up to £6,000 the following tax year, though this ‘carry-forward’ is limited to one year.
– Small Gift Allowance
£250 per person for occasions like birthdays or Christmas, as long as these recipients have not already benefitted from your annual £3,000 exemption.
– Wedding Gifts
You can combine a wedding gift allowance with any other allowance, except for the small gift allowance.
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to any other person
– Regular Support Payments
Regular financial support to a child or grandchild from your taxed income, such as contributions towards living expenses or educational fees, are also tax-free. This support must not affect your standard of living and should come from your surplus income to ensure it doesn’t attract taxation.
What are Potentially Exempt Transfers (PETs)?
PETs refer to gifts made to individuals other than your spouse or civil partner that might become subject to taxation in the future, depending on the timing of your death.
If you survive more than seven years after making the gift, it won’t attract tax. However, if you pass away within this period, the gift will be considered part of your estate and be subject to inheritance tax. The amount of tax imposed is based on the duration between the gift and your death, applying a sliding scale known as taper relief:
| Less than 3 years before death: |
40% |
| Less than 4 years: |
32% |
| Less than 5 years: |
24% |
| Less than 6 years: |
16% |
| Less than 7 years: |
8% |
| More than 7 years: |
0% |
If these gifts do attract tax, the responsibility for payment falls to the recipients, with the tax calculated retrospectively after your death.
PETs aim to prevent significant estate reduction through gifts made shortly before death deliberately to avoid inheritance tax (where the estate exceeds the IHT threshold, currently set at £325,000).
People who pass property onto their children or grandchildren can benefit from a larger, tax-free IHT personal allowance. This extra allowance is £175,000 or the value of the interest in the property, whichever is lower – taking the total tax-free personal allowance to £500,000 for an individual. Therefore, IHT on property passed onto direct descendants is only applied when the total estate is valued at greater than £500,000 (if the share of the property is valued at £175,000 or higher).
What are the alternatives to tax-efficient gifting?
There are a number of other ways to help your grandchildren out financially. For instance:
– Invest in a Junior ISA
These are tax-efficient savings vehicles for children under 18. While only a parent or legal guardian can open the account, anyone can contribute, ensuring the total invested doesn’t exceed £9,000 within the tax year, without incurring tax.
– Purchase Premium Bonds
Investing in Premium Bonds through NS&I is another option. While these bonds don’t yield regular interest, they do offer the opportunity for tax-free prize winnings each month.
– Create a Trust
Establishing a trust can earmark funds for a grandchild until they reach a certain age, providing a tax-efficient way to pass on wealth. Trusts are subject to complex tax rules, so it is recommended that you consult with a financial or legal adviser to navigate this option effectively.
Amber River financial planning
Supporting your grandchildren financially is a meaningful way to enhance their wellbeing. By carefully managing tax allowances and the manner of your gifts, you can ensure your generosity has the maximum impact.
If you have substantial assets likely to exceed the IHT threshold, or have any particular concerns, seeking advice from an independent financial advisor could prevent unexpected tax bills for your loved ones after your death.
Get in touch
Amber River has a network of financial planners right across the UK, ready to offer truly independent advice. If you want to set up an initial appointment, call 0800 915 0000, or alternatively use our contact form here.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
To learn about the government’s most recently-announced changes, please read our latest budget roundup: 2024 Autumn Budget Update
