As a grandparent, you might be considering gifting money to grandchildren to enrich their lives or help with living expenses.
However, you’re also probably aware that there are rules in place, and taxes apply if you decide to give money to grandchildren.
With this in mind, it’s important to know: what’s the best way for grandparents to give money to grandchildren, and how much can I gift my grandchildren tax-free?
Below, we’ve compiled everything you need to know about gifting money to grandchildren, Inheritance Tax and other taxes that may apply to your gift, and when these taxes apply.
How much can I gift my grandchildren tax-free?
It’s normal for grandparents to want to contribute financially to the lives of their grandchildren, from helping them with the deposit to buy their first home to giving them a little extra spending money for fun.
But what’s the best way for grandparents to give money to grandchildren, and how much can I gift my grandchildren tax-free?
Grandparents can give up to £3,000 to grandchildren in a single tax year. If a grandparent doesn’t use this, it carries over to the following year. So, how much can I gift my grandchildren in the second year?
If a grandparent hasn’t given any monetary gifts in the previous year, you can gift up to £6,000 tax-free.
However, this only carries over for one year, so you couldn’t gift £9,000 the next year, even if you hadn’t given anything to your grandchildren in the previous two years.
Grandparents can also give an unlimited number of £250 gifts to grandchildren, provided the recipient differs each time.
The benefits of gifting money to grandchildren
One of the joys of being older is having grandchildren, which is why many grandparents want to know how to start gifting money to grandchildren.
Young people usually don’t have as much money as their older relatives. Yet, some of life’s biggest expenses are exclusive to being young: education, buying a first home, and having a baby.
Giving money to grandchildren is a great way to reduce the financial stresses your grandchildren face, giving them a financial buffer in case of emergencies. Monetary gifts can enhance their lives at the most crucial time and set your mind at ease about their future.
So, you’re searching for the best way for grandparents to give money to grandchildren. With this in mind, you might decide to:
· Set up a trust to become available to them in early adulthood
· Pay for/contribute to the cost of their education
· Give regular payments to help them with their living expenses
· Give a monetary wedding gift
· Begin a pension for your grandchild
Any – or all – of these things can contribute to a grandchild’s financial security throughout their lifetime.
Considerations before gifting money to grandchildren
While giving money to grandchildren can be incredibly rewarding for everyone involved, there are a few things you should consider before you go ahead with giving money to grandchildren.
Firstly, make sure you can afford to gift money to your grandchildren. The amount you have in mind shouldn’t threaten your financial stability or quality of life.
What’s more, to qualify for tax exemptions on regular payments that help your grandchildren with living costs, monetary gifts to your grandchildren mustn’t decrease your own standard of living.
It’s also important to talk to your grandchildren’s parents before you give them any money. Open and transparent communication about money ensures that gifting money to grandchildren only has positive outcomes.
You should also know the tax liability on any gifts you make, which you can learn about below.
Understanding gift exemptions and inheritance tax
One of the concerns grandparents have when gifting money to grandchildren is whether their gifts will be subject to paying inheritance tax and how this will affect their grandchildren.
We’ve detailed what inheritance tax is and how it affects possible gifts made to grandchildren from grandparents.
What is Inheritance Tax in simple terms?
Inheritance Tax is a tax applied to the estate – a.k.a. the total value of assets – that a person leaves behind when they die.
How does Inheritance Tax work with gifts?
Depending on the circumstances, gifting money to grandchildren may be tax-free or subject to inheritance tax of up to 40% of the value of the gift.
Here’s everything you need to know about how inheritance tax applies to gifting money to grandchildren.
A lifetime transfer from a grandparent to a grandchild is made during the grandparent’s lifetime. If a grandparent’s gift is under the value of £325,000 for the year 2023/24 – called the nil-rate band – the gifts may be passed on inheritance tax-free. This threshold may change year on year.
Any gifts given above this amount will be subject to inheritance tax, which is currently 40%. This doesn’t mean the total estate is subject to 40% tax – the first £325,000 is still tax-free – but any amount above that threshold will be taxed by 40%.
However, this is a general rule. When the gift given to a spouse or civil partner or a business is being transferred from one person to another upon someone’s death, tax reliefs apply.
If a gift to a grandchild is made within seven years of the grandparent’s death, gifts may still be subject to inheritance tax. Depending on how many years after a gift is made that the grandparent dies, the gift will be given tax relief that increases up to the 7-year point. This is called taper relief.
Inheritance tax can be tricky to navigate, so it’s a good idea to consult a financial professional before gifting money to grandchildren. Consulting with a financial advisor will help guide you to the best way for grandparents to give money to grandchildren, advise you on the tax payable and how to minimise tax liability.
They’ll also help you to establish a plan to ensure the appropriate inheritance tax can be paid on your estate when you die without compromising your estate or the financial positions of your grandchildren.
Potentially exempt transfers
Gifts made by a grandparent may be a potentially exempt transfer – i.e., exempt from inheritance tax – if the grandparent survives for seven years after the gift is made.
In this way, gifting money to grandchildren – among other assets – can be a powerful estate planning tool to transfer more of your estate’s value to your loved ones and reduce the inheritance tax paid by your beneficiaries upon your death.
However, if the grandparent passes away before seven years, the gift is included as part of their overall estate and is therefore liable for inheritance tax.
If a grandparent dies between 3 and 7 years from the date the gift is made, the gift may qualify for tax relief known as ‘taper relief’, which offers a reduced tax rate the longer a grandparent lives after gifting money to grandchildren.
If a grandparent gives multiple potentially exempt transfers (gifts), the cumulative value of gifts is calculated to determine the inheritance tax owed on the gifts.
Taper relief is a kind of tax relief applied to gifts given 3-7 years before a person’s death. The longer the period between the date the gift was given and the death of the person who gifted an amount, the less tax must be paid.
If a grandparent gifts grandchildren money or other assets over seven years before their death, they don’t need to pay any inheritance tax.
Below is a table showing the percentage inheritance tax applied to gifts that have been given in the years before someone’s death.
Capital Gains Tax (CGT)
Capital gains tax (CGT) is the tax applied to any profit earned from the sale of assets, such as property, investments, and possessions.
For example, if an artwork were bought for £200 and sold for £1000, capital gains tax would be due on the £800 profit made.
Capital gains tax can be applied when an asset is sold, gifted, or disposed of. If the asset is bequeathed, the recipient of the asset only needs to be concerned with CGT if it makes a profit when sold.
What does ‘disposing of an asset’ mean?
Disposing of an asset means relinquishing ownership of that asset, whether through selling it, gifting it, getting rid of it, or otherwise transferring it so that a person no longer legally owns the asset. For example, you might sell a property, give away an antique, or transfer ownership of a vehicle.
What do you pay CGT on?
You pay capital gains tax on the following:
· Most personal possessions worth £6k or more, besides your car
· Any property you own that isn’t your ‘main home’ unless the property size is over 5,000 sqm.
· Investments besides those in an ISA or PEP
· Business assets
If you own any cryptoassets, you can check if you need to pay tax when you sell cryptoassets through the UK government website.
What do you not pay CGT on?
You don’t need to pay capital gains tax on any profit made from:
· Your home (provided you’ve never let out the home – or part of the home – and have never used part of it exclusively for business purposes, and it has been your main home for the total time you’ve owned it)
· Individual Savings Accounts (ISAs), Personal Equity Plans (PEPs)
· Premium bonds or UK government gilts
· Lottery or pools winnings
Communication and transparency with gifting
When gifting money to grandchildren, being open with everyone involved is important. If your grandchildren are minors, it’s vital to tell their parents. However, even if your grandchildren are adults, it’s best to run your intentions to gift money to your grandchildren by them first.
Giving money to grandchildren is also a great opportunity to motivate your grandchildren to learn more about finance and money management. From how to budget as a student – if you’re helping them with the cost of their education – to encouraging them to save money for a house. You can also enlist the help of an app like HyperJar to deposit your gift and make it easy for your grandchildren to save and budget.
The importance of documenting gifts
As a grandparent gifting money to grandchildren, keeping a record of every monetary gift you give is vital.
You should include the date the gifts were given, the name of the recipient, and the amount you gave. If possible, keep any paperwork that substantiates this information.
A comprehensive record like this will help smooth the process of paying inheritance tax for your grandkids. It’ll help to make tax calculations black-and-white and allow them to avoid paying inheritance tax where necessary.
It’s always a good idea to check with a financial professional that you have all the documents to help your grandchildren calculate – or avoid – inheritance tax.
Gifting money to grandchildren can be an excellent way for grandparents to impact the lives of their younger relatives. It can help to ease some of the financial burdens of being young, help them prepare for their future or simply enrich their lives with fun experiences.
However, when giving money to grandchildren, you must be aware of the taxes that apply to gifts and the best way for grandparents to give money to grandchildren while avoiding inheritance tax.
Giving gifts of up to £3000 to your grandchild – and an unlimited number of £250 gifts to any other grandchildren you have – is possible every year. With the HyperJar prepaid kids card, teen card or prepaid card for adults, you can deposit gifts easily and give your grandchildren access to their money straight away, with the tools they need to save and budget to make their gift stretch further.