How much can I give my grandchildren tax-free?
From school fees and university to putting money towards a deposit, gifts of money from grandparents can make a real difference to grandchildren’s lives. And based on the current Inheritance Tax (IHT) exemptions, giving little and often could help you reduce or avoid any IHT liability.
So, how much can you gift to your grandchildren tax-free? Each grandparent can gift up to £3,000 in any one tax year, exempt from IHT. If the whole £3,000 is not used in any single tax year, the balance can be carried forward to the next taxyear. So if you make no cash gifts in one tax year, you can give away a total of £6,000 in the next tax year. However, any unused is lost if not utilised in the next year. In short it cannot be carried forward to year 3. This exemption applies to lifetime gifts.
It’s also possible to make an unlimited number of small £250 gifts in each tax yearso long as the recipient is a different person each time. What’s more, there are exemptions of up to £2,500 for gifts made in respect of a grandchild (or great-grandchild’s) wedding or civil partnership; this increases to £5,000 if your own child is tying the knot.
Gifting money to grandchildren
Before you decide how much to gift to your grandchildren, you’ll understandably want to know how this compares to gifting to your adult offspring.
How much can you gift tax-free to children?
As with gifting to grandchildren, you can give away up to £3,000 worth of gifts tax-free to your children in a single tax year. This is known as your annual exemption. Technically, you can gift as much money to your children or other family members as you like, but in order for your gift to be Inheritance Tax-free, you would need to live for at least seven years from the date the gift is made. This is what is known as the seven year rule for gifts – officially known as a Potentially Exempt Transfer (PET) – which we’ll cover in more detail later. Note that there may still be Capital Gains Tax due when gifting money to children.
How does Capital Gains Tax work with gifts?
Capital Gains Tax (CGT) is charged on the ‘gain’ made on non-cash gifts when these assets are sold, such as property (other than your main home), shares and personal possessions worth at least £6,000, with the exception of cars.
When gifting property to children and other assets, they will only need to work out whether they need to pay CGT if they later dispose of the asset.
A transaction can be subject to both Capital Gains Tax and Inheritance Tax, and in this case some double tax relief may be available. In calculating the loss to the estate, no account is taken of any CGT (or any stamp duty or additional expenses) borne by the recipient of the value transferred.
In short, Capital Gains Tax is a tax on the profit received when you sell or dispose of an asset that has increased in value. The gain, or the profit, is taxed, not the amount of money you receive. For example, if you bought a painting for £1,000 but it sold for £30,000 then the gain is £29,000. You will only pay Capital Gains Tax if all your gains in a year exceed the threshold (£6000 in 2023-24).
How else can I give my grandchildren tax-free gifts?
Other options could include contributing to a Junior ISA (Independent Savings Account) for your grandchild. While you can’t set this up unless you have parental duties, you can contribute after the account has been opened. These tax-free savings accounts have an annual limit of up to £9,000 (2023-24 tax-year). It is possible to invest in cash or stocks and shares with a Junior ISA, which your grandchild can access on their 18th birthday.
Another option would be to contribute £2,880 to a pension. The child will benefit from 20% tax relief on top of this, taking the total to £3,600 a year into their child's pension, which can take the form of a self-invested personal pension (Sipp), or a stakeholder pension, among other types.
The disadvantage is that the money will be tied up until the child is in their late fifties. While having a nest egg ready for retirement may be a prudent measure, it could prove frustrating having a pension pot that can only be accessed at retirement when in most cases there may be a clear need for the funds earlier in life e.g. to get their foot on the property ladder, start a business, go travelling, buy a car or pay off a student loan.
You should always speak to a professional if you need more information or help in making a decision.
So, how much can you gift your grandchildren? The answer, of course, depends on whether they’ve got wedding bells on the horizon, but in normal circ*mstances, you can gift many thousands of pounds a year through large and small gifts, pension contributions, and yes, plenty of presents and pocket money.
