The ultimate guide to gifting money to your grandchildren

Gifting money to your grandchildren is a great way to help them get set up for later 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 will be eligible for tax.

This is how inheritance tax (IHT) works. You can leave up to £325,000 to beneficiaries tax-free, but anything over this threshold (the nil-rate band) will be liable for tax paid from the estate – often at 40%. 

However, if you pass your home to a direct descendant, an additional residence nil rate band (RNRB) of up to £175,000 is available, potentially increasing the total tax-free amount to £500,000.

This 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 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 (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.

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. 

Grandparents can also give an unlimited number of £250 gifts, as long as the recipient is different each time.

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 burden. 

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, 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.  

If you 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 applies if the total value of gifts exceeds the nil-rate band.

For example, 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% on the amount over the nil-rate band.  

Is property exempt from inheritance tax? 

Properties can be an additional exemption to IHT, but there are limits.

If you pass on your property to a direct descendent, the RNRB allows an additional £175,000 exemption (in the 2024/25 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 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? 

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 2024/25 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 PET rules, it will be exempt from IHT. However, if it’s a large contribution, then you may still be liable. 

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, 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.

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.

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.

There are a few different ways that you can help pay towards the futures of your grandchildren without hoisting additional tax burdens onto them.

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.

If you found this article helpful, you might also find our article on teaching kids about money informative, too!