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The ultimate guide to gifting money to your grandchildren

Updated 03 December 2021

5min read

Kate Morgan
Staff Writer

Gifting money to your grandchildren is a great way to help them get set up for later life. But gifting large sums of money at the wrong time can see a large chunk of the gift subject to a heavy tax burden.

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

What is inheritance tax? 

Deciding to pass some of your estate onto your grandchildren is a great way to contribute to the future financial wellbeing of your next of kin. 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 will be eligible for tax. This is how inheritance tax works. You can leave up to £325,000 to your beneficiaries tax-free, but anything over this inheritance tax threshold (IHT) will be eligible for tax – often at about 40%. 

This can represent a large amount for many estates, and with the beneficiary of this money the one responsible for paying the tax, this can be a large outlay. Fortunately, there are ways to reduce your inheritance tax contributions, while continuing to make helpful payments to future generations. 

What is exempt from inheritance tax? 

There is an inheritance tax annual exemption, which is useful if you wanted to make a yearly contribution to your next of kin or grandchildren. You can gift up to £3,000 a year, or £6,000 if you didn’t use the previous year’s exemption (although you can only build a single year’s additional exemption). 

There are also some gifts that are exempt from inheritance tax. Parents can give their children up to £5,000 as a wedding gift, while grandparents can give £2,500. Grandparents can also give an unlimited number of £250 gifts, as long as the recipient is different each time. 

What are potentially exempt transfers? 

Just because you’ve given a sum of money that exceeds the IHT, it doesn’t necessarily mean your recipient will need to foot the tax burden. Should you gift a sum above the IHT and live beyond the seven years following, this sum will still be considered tax-free, hence why these contributions are called ‘potentially exempt’. Although it’s not nice to think about, the shorter the time between the gift being given and death, the greater the tax; the longer the time, the smaller the tax burden.  

Potentially exempt transfers taper based on these two things, with the final amount of tax due depending on how long you continue to live after making the gift. If you die within three years of the gift, it may be eligible for a 40% tax; if you survive between six and seven years, it becomes only 8%.  

What about property? 

Properties can be an additional exemption to inheritance tax. You can freely pass on your property to a direct descendent as long as the property is worth no more than £350,000. This means that if you leave a property of £350,000 and a cash sum of the same value, your total exemption will be £500,000. While there are some exceptions to these rules, properties can generally be left to direct descendants without paying tax. 

Gifts for juniors 

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

When it comes to leaving gifts or lump sums for grandchildren, junior ISAs are a good way of combining different financial gifts in an individual account. Only a parent or direct guardian can open a junior ISA, but anyone can pay into these accounts. Up to a limit of £20,000, you could make a maximum annual contribution of around £9,000 a year of tax-free money. There is also the option of opening a junior stocks and shares ISA, where the contents will depend on the returns of the stocks and shares owned.  

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. 

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. 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. 

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, the weekly shop, 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 now graduate’s current earnings. 

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 overall inheritance tax liability as the giver, you’ll also free up cash or assets to give to your direct descendants. While the help-to-buy ISA has now been wound down, you can continue to help future homeowners 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 act in 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 very rare for the responsibility of making up a mortgage payment to fully extend to you, so you shouldn’t need to worry too much about the potential repercussions.  

There are a few different ways that you can help pay towards the futures of your grandchildren, without hoisting additional tax burdens onto them. While these gifting money to grandchildren suggestions can all make a meaningful difference, there may be other ways besides, so it is worth speaking with a dedicated financial adviser on how you can leave a lasting financial impact on your children and grandchildren. Unbiased has 27,000 independent financial professionals across the country. Let us match you to your perfect financial adviser. 

About the author
Kate has written for leading publications and blue chip companies over the last 20 years.