How to give financial gifts to grandchildren

11 December 2014 ( 13 September 2017 )

A guide to the tax implications of giving money to your grandchildren.

You want to give your grandchildren a financial boost, and avoid letting the taxman swallow their inheritance. So how best should you go about this, and what are the rules?

When is the best time to make a gift to grandchildren?

Slotting cash or a cheque into birthday or Christmas cards is a way of making annual gifts. But there are other life stages when you can hand over spare cash which will have a more lasting impact. 

This could be when they reach university age, towards a deposit on a first home, or the cost of a wedding. 

These may be times when stepping in with a little financial assistance is particularly helpful. 

Will you get taxed on the money you give to your children?

How much tax-free money can you give as a gift to grandchildren?

The small gifts allowance enables you to give up to £250 free from inheritance tax (IHT) to as many people as you like, each tax year. However, you cannot use this allowance together with any other exemption when giving to the same person. 

You can give up to £3,000 per tax year that will be exempt from IHT, known as your ‘annual exemption’. If you haven’t gifted any money the previous tax year, you can carry forward any unused allowance (but only for one year), enabling you to give up to £6,000 free from IHT. 

It’s possible to give larger sums that won’t be counted for tax purposes, provided you survive for seven years afterwards. This is known as a ‘potentially exempt transfer’. 

If you don’t survive the full seven years these gifts will use part of your nil rate band (£325,000 for the 2017/18 tax year) available to offset against your estate on death. 

Any gifts outside this are subject to IHT at 40%.

A guide to inheritance tax...

How to set up a trust for grandchildren

Alternatively, you could set up a trust with your grandchild able to access the fund at age 18. Any sums held over £3,000 will be subject to the seven-year survival rule, although growth in underlying investments is free from IHT. It’s wise to seek financial advice if you are going down this route. 

How to open a savings account for grandchildren

You are able to open a savings account in your grandchild’s name, provided you have the right documents such as a birth certificate. Interest will be paid without tax being deducted automatically. 

A benefit is that no amount of interest earned on cash paid in by a grandparent is subject to tax (up to the personal allowance of £11,500 for the 2017/18 tax year). 

In contrast, only the first £100 on interest earned on money paid in by a parent each year is tax-free.

A common choice by grandparents is to make payments into a Junior ISA. While you cannot open this yourself as a grandparent, you can make contributions up to the annual limit, which is £4,128 for 2017/18, and any interest earned is tax free. 

This can be topped up in various ways, including online, so you could set up monthly direct debits into the account. Money held cannot be accessed until the child is age 18. 

It’s also possible to buy Premium Bonds for a grandchild, with a minimum investment of £100.

Find out the rules about giving money to children under 18.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.