Quick answer: IHT gifts to grandchildren can use the £3,000 annual exemption, small gift allowance, and potentially the surplus income exemption. Larger gifts are usually PETs; consider trusts for control.
——
Gifting to grandchildren is a wonderful way to support their future, whether it’s helping with school fees, setting up savings, or simply sharing your good fortune. But when it comes to inheritance tax (IHT), the rules can be confusing. Many families in England and Wales want to make the most of their allowances and avoid unnecessary tax, but aren’t sure how to do it. Here’s a clear guide to your options, what to watch out for, and how to keep things simple and effective.
Your Options for Gifting
1. Regular Payments from Surplus Income
If your income comfortably covers your living costs and you have money left over, you can make regular gifts to your grandchildren from this surplus. These gifts can be exempt from IHT if you keep good records and show they don’t affect your standard of living. For example, paying school fees or making annual birthday gifts from surplus pension income can be a tax-efficient way to help.
To qualify, you need to:
Show a clear pattern of giving (e.g., annual or monthly gifts)
Document your income, expenses, and surplus
Keep a schedule and bank statements as evidence
2. Lump-Sum PETs—Start the 7-Year Clock Early
A potentially exempt transfer (PET) is a lump-sum gift that falls outside your annual exemptions. If you survive seven years after making the gift, it’s free from IHT. Starting the clock early is key—if you’re planning a large gift, consider doing it sooner rather than later.
For example, if you give £20,000 to a grandchild for university, that’s a PET. If you live for seven years after the gift, it’s outside your estate for IHT. If you die within seven years, the gift may be taxed, but the rate tapers after three years.
3. Junior ISAs or Trusts for School Fees
You can contribute to a grandchild’s Junior ISA, or set up a bare or discretionary trust to pay for school fees or other expenses. Trusts can be useful if you want to retain some control over how the money is used, especially for larger sums.
A bare trust gives the grandchild immediate rights to the money at 18, while a discretionary trust allows you to set conditions and choose when and how funds are released. Both options can help with IHT planning, but trusts have their own tax rules and reporting requirements.
Watch-Outs and Common Pitfalls
Ignoring the £3,000 Annual Exemption and Carry-Forward Rule
Each person can gift up to £3,000 per tax year free from IHT. If you don’t use it one year, you can carry it forward to the next, but only for one year. If you’re gifting to more than one grandchild, plan carefully to use your exemption for each.
Small Gift Limits
You can also give up to £250 per person per year to any number of people, as long as they don’t also receive part of your £3,000 exemption. These small gifts are often overlooked but can add up.
Funding from Capital but Claiming Surplus Income Exemption
If you make gifts from your savings or investments, you can’t claim the surplus income exemption. HMRC will check your records, so be clear about the source of your gifts.
Control Needs—Consider Trusts for Larger Sums
If you’re gifting large amounts and want to control how the money is used, a trust may be the best route. This is especially important if your grandchildren are young or you want to ensure the money is used for education or other specific purposes.
Real Example
Two grandparents each gift £3,000 annually to two grandchildren, using their annual exemption. They also pay school fees from surplus income, documenting everything in a schedule and keeping bank statements. By using both the annual exemption and the surplus income exemption, they minimise the IHT impact and support their grandchildren’s future.
Practical Steps
Decide on Your Gifting Pattern:
Will you make regular payments, lump-sum gifts, or contribute to a trust or Junior ISA?Document Everything:
Keep a schedule of gifts, bank statements, and details of your income and expenses. This is essential for claiming exemptions.Use Your Allowances Wisely:
Make use of the £3,000 annual exemption, carry it forward if needed, and consider small gift limits.Consider Trusts for Larger Sums:
If you want to retain control, set up a bare or discretionary trust and get clear on the rules.Start Early:
For lump-sum PETs, the seven-year clock starts when you make the gift. The sooner you start, the better.
Final Thoughts
Gifting to grandchildren is a generous and thoughtful way to support their future, but it pays to be organised. By understanding your options, using your allowances, and keeping good records, you can minimise IHT and make sure your gifts have the greatest impact. If your situation is complex, take time to review your plans and consider all the possibilities.
Disclaimer: This article provides general information for educational purposes only. It is not legal, medical, financial or tax advice. Outcomes can vary based on your personal circumstances.
No credit card required
