The best ways to gift money to grandchildren in the UK

Gifting money to your grandchildren is a great way to give them a head start in life.

However, gifting large sums of money at the wrong time can see a large chunk of the gift subject to inheritance tax (IHT) or capital gains tax (CGT) if you haven’t understood the seven-year rule for gifts and how it can affect tax liabilities. 

In this article, we cover how to leave a financial gift to your grandchildren, the best time to do it, and what sorts of gifts will go the furthest.

What is inheritance tax? 

Passing on some of your estate to your grandchildren is a great way to contribute to their future financial wellbeing.

Whether you choose to leave a lump sum in an individual savings account (ISA), top up an ISA at a regular interval, or decide to leave a lump sum in your will, there are a few different ways you can leave some money behind, but there are also taxes to pay. 

Although you can send a decent sum of money to your grandchildren or children, anything above a certain threshold could be eligible for tax.

This is how inheritance tax (IHT) works.

IHT can represent a large amount for many estates, and with the tax paid by the estate before distribution to the beneficiaries, it can impact the amount passed onto your loved ones significantly.

Fortunately, there are ways to reduce your IHT bill while continuing to gift future generations.

What is exempt from inheritance tax? 

There is an inheritance tax annual gifts exemption, which is useful if you wanted to make a yearly contribution to your next of kin or grandchildren. 

Here’s a summary of the IHT rules on gifts. Gifts given within these rules are exempt from IHT, even if you die within 7 years, although you need to keep careful records.

Annual exemption

You can gift up to £3,000 a year or £6,000 if you didn’t use the previous year’s exemption (but you can only carry forward the exemption for one year).

It’s important to note this is the total amount given by an individual, not per recipient so you would have to split this allowance across multiple people.

Small gifts

Grandparents can also give an unlimited number of £250 gifts, as long as the recipient is different each time and you haven’t used another allowance on the same person.

Wedding gifts

There are also some gifts that are exempt from IHT. Parents can give their children up to £5,000 as a wedding gift, while grandparents can give £2,500.

These must be given on or shortly before the marriage, and are not part of your allowance that you can carry forward to the next year.

Gifts from regular surplus income

Regular gifts from your surplus income are exempt from IHT, even if you die within 7 years.

The gifts need to from your income in the current tax year, be part of your normal expenditure and leave you enough to live on.

There are complex criteria, so it’s worth getting financial advice if you want to use this rule.

What are potentially exempt transfers? 

If you’ve given a sum of money that exceeds IHT, it doesn’t necessarily mean your recipient will need to foot the tax bill.

Should you gift a sum above the IHT threshold and live beyond seven years following the gift, this sum will still be considered tax-free, hence why these contributions are called ‘potentially exempt transfers’ (PETs). 

While it’s not nice to think about it, for large gifts, the shorter the time between the gift being given and your death, the greater the tax; the longer the time, the smaller the tax burden.  

Taper relief may be available for larger gifts. If you give gifts worth totalling over £325,000 and pass away within seven years of making the gift, the amount of tax due may be reduced on a sliding scale, known as taper relief.

Taper relief does not reduce IHT on the entire gift; it only reduces the tax that would have been due on the portion of the gift over £325,000.

For example, if you give away £425,000 within 7 years of your death, your estate could owe tax on £100,000 of your gift (£425,000 minus £325,000).

However, the tax due could reduce from 40% to between 8% to 32% on a sliding scale, depending how long you live after the gift.  

Is property exempt from inheritance tax? 

Passing on property when you die can potentially reduce your IHT bill, but there are limits.

If you pass on your property to a direct descendent, the RNRB allows an additional £175,000 exemption (in the 2025/26 tax year).

When combined with the standard nil-rate band of £325,000, this can increase the total inheritance tax threshold to £500,000 for an individual.

However, the RNRB starts to taper if the estate is worth more than £2 million.

If the estate is below this threshold, properties can generally be left to direct descendants with reduced or no tax liability, depending on the combined exemptions.

What are the rules for capital gains tax on gifts?

Capital gains tax (CGT) is potentially due when you sell or give away assets to anyone apart from your spouse.

If you’re giving a cash gift to grandchildren, then CGT won’t apply.

However, giving away property or shares to your grandchildren could trigger a CGT bill. 

Any gifts over the annual exemption of £3,000 are charged CGT, depending on your tax band.

Here’s how CGT could work on a £10,000 gift of property or shares.

What is the inheritance tax on gifts for juniors? 

So, with these rules in mind, what kinds of monetary gifts for grandchildren can you set up for the future?

Using your IHT annual exemption to give up to £3,000 each year means there’ll be no IHT to pay even if you die within 7 years.

When leaving gifts or lump sums for grandchildren, junior ISAs are a good way of combining different financial gifts in an individual account.

A parent or guardian can open a junior ISA, but anyone can pay into these accounts, which allows flexibility in gifting options for grandchildren. 

The annual contribution limit for a Junior ISA is £9,000 for the 2025/26 tax year.

This is a limit per child rather than per contributor (unlike the previously mentioned gifting rules).

There is also the option of opening a junior stocks and shares ISA, where the balance will depend on the returns of the investments.  

As this money can only be accessed when the child reaches 18, junior ISAs are a great way to top up a savings account for a young person annually, or if you’d prefer, with a lump sum.

What is the inheritance tax on gifts for students? 

University is a costly business and students will often be repaying their tuition fees years after graduation.

Whether you want to make financial contributions to your next of kin throughout their time at university or to help pay off their fees after graduation, these gifts will make a real difference to a student’s financial situation.

It’s important to understand that if the gift falls within the annual exemption or surplus income  or PET rules, it will be exempt from IHT.

However, if it’s a large contribution, then the gift may be included in your estate if you die within 7 years. you may still be liable. 

There are a few different ways to contribute towards a student’s financial situation, so you’ll need to decide whether you want to help pay for student accommodation, groceries, pay down overdrafts or loans, or simply to make a monthly stipend.

If it’s the final student debt you want to help with, ensure you know what a good contribution would be, as the repayments taper based on the graduate’s earnings.

Repayments might be more complex than they seem, though, so it’s important that all parties fully understand the total amount of student debt repayable, as the final amount can taper. 

What is the inheritance tax on gifts for savers? 

Saving for a first house can be a challenge, so sometimes grandparents might downsize their home to help contribute. Not only will this reduce your IHT bill as the giver, but you’ll also free up cash or assets to give to your direct descendants.

However, take care here because gifts within 7 years of your death could still be caught in the IHT net.

While the help to buy ISA is no longer available, the Lifetime ISA is.

This allows individuals to save up to £4,000 per year, with the government adding a 25% bonus. You can also help by gifting within your annual exemption or by leaving your property to your children.  

There is also the option of being a mortgage loan guarantor. If your next of kin needs a guarantor during the home buying process, agreeing to this role can help speed up the process for them.

Although this does make you equally responsible for helping the buyer make mortgage payments, it is rare for the responsibility of making up a mortgage payment to fully extend to you.

Get expert financial advice

Gifting money and assets to grandchildren is a thoughtful way to support their future while navigating IHT. By taking advantage of various allowances and exemptions, you can help secure their financial wellbeing and potentially reduce tax liabilities, making a lasting impact for future generations.

Unbiased can quickly match you with a financial adviser for expert financial advice on how to make tax-efficient gifts to your grandchildren and manage your estate planning effectively.