Every grandparent can give up to £3000 tax-free per tax year. If you gift less than this, you can carry the remaining amount into the next tax year.
Research from the Open Work Partnership has found three-quarters (72%) of grandparents plan to give money to grandchildren, with 24% aiming to give £15,000 or more per child. To ensure this money is tax-free, here's what you need to know about gifting money to family.
How much can I give tax-free?
In every tax year, (which runs from 6th April to 5th April the following year), you can give a grandchild £3000. This is known as the annual exemption, meaning there will be no tax to p[ay on this amount.
Related: How to explain tax to kids
How else can I give my grandchildren tax-free gifts?
Outside of the annual exemption, you can gift money to your children and grandchildren without it being taxed in the following ways:
- Small gift exemption: You can make tax-free gifts of up to £250 per grandchild for birthdays or at Christmas. This is only if your grandchildren haven't previously been gifted the annual exemption.
- Each grandparent can also give up to £2,500 tax-free for a grandchild's wedding.
- You can also make regular monthly payments from your taxed income into a child's savings account (see below). Your taxed income is anything over your Standard Personal Allowance of £12,570 per year.
- On top of this, you can give a child or grandchild money out of your taxed income by regularly contributing to their expenses, such as school fees.
What kind of savings can I contribute towards tax-free?
Regular kids saving accounts.
You can make regular payments into a savings account for a child under 18, and there's no limit to how much you can give tax-free. This is known as 'normal expenditure out of income' and can be combined with any other allowance. For example, you can give your grandchild a regular payment of £50 a month into savings as well as use your annual exemption of £3,000 in the same tax year.
Related: Why your child should have a savings account
Pay into their Junior ISA.
Like a standard ISA, Junior ISAs are tax-free savings accounts for children under 18. Only a parent or guardian of the child can open the account, but anyone can pay into a Junior ISA as long as the total contributions don't go over £9,000 in a single tax year. The money is locked away until your grandchild turns 18.
Related: Who can open a Junior ISA?
Premium bonds are issued by National Savings and Investment (NS&I). Unlike other savings, where you earn interest, with Premium Bonds you are entered into a monthly prize draw where you can win between £25 and £1 million tax-free.
Pay into a Child Pension.
Only a parent can set up a child pension fund for a child. However, anyone can contribute to this pension. There is a yearly contribution limit of £2,880, and the Government will then add tax relief at 20% to make this up to £3,600. This pension money is then locked away to grow tax-free until your grandchild turns 55 (this age changes to 57 in 2028 and is likely to change again in your grandchild’s lifetime).
Give larger gifts but be aware of the seven-year rule.
You can also give your grandchild as much money as you want; however, outside of the annual exemption of £3000 tax-free, this money will fall under what's known as the 7-year rule (see below).
Pay into a GoHenry account.
Parents can invite grandparents to join GoHenry by creating their own relative accounts, which then allows them to easily send money to the child's GoHenry account at any time. It's ideal for grandparents who want to contribute to a child's financial learning. Grandparents can also log into their own account, view all the children using GoHenry in their family, instantly transfer money, and set up recurring transfers or send a gift.
Make use of a child's bank account.
You can also gift money via a child's bank account or savings account. Interest on the child's account won't be taxed if the money comes from a grandparent – unlike money given by a parent. If a parent's gift to their child's account gains any interest over £100 a year, it will be taxed as if it was earned by the parent.
What tax can be charged on gifts to grandchildren?
Inheritance tax may be applied to gifts to grandchildren (outside of the annual £3000 exemption). This is a 40% tax applied after a person dies to estates worth over £325,000 – or more if a home is included.
How does inheritance tax work with gifts?
Gifts that fall outside the above exemptions are included in a financial calculation of the estate if it's less than seven years since the gift was given.
For example, a grandfather gives his grandson £15,000 on top of the annual £3000 that's exempt from tax. He then passes away. The £15,000 must now be included in the calculation of his estate, and will be liable for inheritance tax if the value of the estate exceeds £325,000.
What is taper relief?
Taper relief is tax relief on gifts given 3 to 7 years before a grandparent passes away. It means if you gift money over the annual exemption, it will be taxed on a sliding scale from 32% to 8% under the inheritance tax ruling.
Who pays inheritance tax when someone passes away?
Inheritance tax is paid from the amount your estate is worth by the person dealing with it (known as the 'executor'). The remaining amount after tax goes to the people who inherit your estate.
How does capital gains tax work with gifts?
Capital Gains Tax (CGT) is a tax on the financial 'gain' made on non-cash gifts when the assets are sold. Assets are gifts such as property, stocks, bonds, digital assets like cryptocurrencies, jewellery, and stamp and coin collections.