Gifting Money to Grandchildren
When an individual or a couple is lucky enough to have plenty of retirement funds after finishing work, it may be the first time in their life that they are able to think about gifting money to grandchildren.
They may want to spend this money at a time in their life when they do not have to worry about looking after dependents, or keeping their job.
Another reason people choose to gift money to their grandchildren is that they recognise the challenges younger people face when it comes to managing the high cost of living with stagnant wages.
This is particularly relevant at the moment, as the cost-of-living crisis is leaving many young people unable to afford to buy or rent, subjecting them to a poor standard of living.
Some grandparents turn to gifting money to grandchildren as they want them to have the best opportunities in life. Perhaps their parents helped them out when they were young, and they want to pay it forward to the younger generations in their family. This could involve paying for education, housing, or job training.
Finally, some people may choose to start saving up for their grandchildren as soon as they are born. This ensures they always have savings to fall back on, and their future is somewhat set up for them in terms of being able to buy a house, get higher education, and start a family.
Examples of Gifting Money to Grandchildren include:
- Giving money directly (lump sum, monthly bank transfers etc)
- Paying for university tuition fees and/or maintenance loans
- Paying for a big life event (weddings, baby showers, milestone birthday parties)
- Paying for their deposit on a house
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Is there any Reason to Avoid Gifting Money to Grandchildren?
It goes without saying that you should make sure you can afford gifting money to your grandchildren before you do it. We recommend calculating your money for retirement, figuring out how much you will be spending per year, and deciding whether you have enough money to spare some for your grandchildren.
Another reason to avoid gifting money to grandchildren will be if you are being pressured into it.
It isn’t uncommon for older people to be pushed to give their money to younger relatives, and this is often the start of an unhealthy relationship involving manipulation, coercion, and sometimes even stealing.
If your children are in a very tricky financial situation, you may want to think about giving money to them before your grandchildren.
For example, if your grandchild has a student loan to get by, but your children are not eligible for many loans to improve their financial situation, you may want to prioritise your children.
This also applies if your grandchildren are very young, and they wouldn’t be inheriting their money for a long time anyway; it would be more effective to give the money to your children.
Finally, if you do not trust your grandchild to spend their money wisely, you may want to hold off on gifting money to grandchildren. You could always pay for something that will improve their future, and avoid giving money directly, e.g., pay for home renovations.
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What About My Child Who Hasn’t Given Me Grandchildren?
Many family disputes occur as a result of unequal gifting. Some older people struggle to know how to keep the situation fair when they want to gift money to their grandchildren, but they also have a child who does not have children of their own.
The pressing question is: should they gift an equal amount of money to their adult child who has no children, and their grandchildren?
This is something you have to decide for yourself, as there is no right or wrong answer. You may want to consider which family members would benefit the most from the money, which ones have already received financial aid from you, and how each family member will eventually benefit from the money left in your will.
However, it is ultimately your decision, and something your family should respect.
Inheritance Tax & Gifting Money to Grandchildren
You can only gift a certain amount of money to your grandchildren before these funds are liable for inheritance tax.
You can gift up to £3000 per tax year without paying inheritance tax (which is known as annual exemption) (1). If your grandchild does not touch this money during the tax year, it can be added on to the next year, and you would still be allowed to gift another £3000 after that.
Remember that this is the rules for one grandchild, so you would be able to gift more money overall if you split it between your grandchildren. If you are gifting to different people every time, you can gift £250 to various recipients as many times as you want in one tax year.
This can either be money, property, stocks and shares, jewellery, or something that you sell for less than the market value, i.e., a house.
The £3000 tax rule applies to the individual as opposed to the couple. This means that both grandparents could gift up to £3000 tax-free in one tax year, giving a total of £6000.
If your gift exceeds £3000 per tax year, you will have to pay inheritance tax, which is 40% of the funds. If you have gifted items, the value of the gift is taken to be the value it was when it was gifted, as opposed to its current value.
There are some exemptions to inheritance tax, aside from gifting money below the threshold, such as:
- Gifts made more than 7 years before the grandparent’s death
- Wedding and civil partnership gifts
- Regular gifts that come from your income (e.g., birthday or Christmas gifts)
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Capital Gains Tax & Gifting Money to Grandchildren
Capital gains tax is only an issue if your grandchild disposes of an asset you have gifted them, such as giving it away or selling it.
In this situation, they will be taxed based on any money they have gained through a sale (the profit). The tax only applies to the amount of money that exceeds the gifted amount, i.e., the profit.
Please keep in mind that if the financial gift exceeded the inheritance tax threshold, your grandchild would most likely be paying both inheritance tax and capital gains tax.
Ideas For Gifting Tax-Free Money to Grandchildren
There are many different ways older people choose to gift money to their grandchildren, to avoid paying tax and ensure their grandchildren are benefitting from as much of the money as they can. Here are some examples.
1. Contributing to a savings account
Our first idea is to pay money into your grandchild’s savings account. This could be a one-off lump sum, or a regular payment not exceeding the minimum tax threshold.
If your grandchild has a junior ISA account, you could start making payments whenever you are ready. However, make sure your contributions do not push the yearly savings over £9000, as this is the limit for money invested in a junior ISA account (2).
Instead of the £3000 maximum threshold for inheritance tax, you can pay up to £9000 into your grandchild’s junior ISA account before the money is liable for inheritance tax.
Your grandchild will only be able to access this money when they turn 18, so keep this in mind when you are thinking about the best way to gift money.
If your grandchild is over 18, you may want to pay into their regular savings account. You could advise them to set up a Lifetime ISA which can help them with the purchase of their first home.
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2. Paying for a regular expense
One simple idea is to pay for a regular expense that your grandchild is currently dealing with. For adolescent grandchildren, this could involve paying for their transport to university, or paying for their monthly phone contract. You could even keep it simple and offer weekly pocket money.
If your grandchild is older, potentially with a family of their own, you could cover things like nursery fees, travel expenses, or rent/mortgage.
3. Repaying tuition fees
If your grandchild has been to university and taken out a student loan, you could consider repaying some or all of these loans to prevent them from being in debt.
Yet, it is not always beneficial for student loans to be paid off. You would need to look at the rules regarding student loan repayment and decide for yourself whether gifting money to grandchildren for student loan repayment would be worth it. It could also get extremely expensive if you have multiple grandchildren.
The rules behind student loan repayment vary depending on which repayment plan your grandchild is on. We are going to explain the rules of plan 2, as this applies to English students who started university between the 1st September 2012 and the 31st July 2023.
People on plan 2 only need to repay their loan when they are earning £524 per week, or £2,274 per month before tax (3). They only need to pay 9% of the part of their income that meets the repayment threshold.
For many young people, they will not have to repay their loan for a very long time, if ever. If they are making repayments, they are likely to be a small dent in their finances.
Furthermore, student debt is currently wiped 30 years after the first repayment was due. This means many students will go their whole lives without having to repay their loan.
This is something to carefully consider for your grandchild, as gifting money to grandchildren in a different way could potentially produce more benefits.
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4. Setting up a trust
The difference between a trust and a will is not always clear, but a trust allows you to give money to your grandchildren while you are still alive, rather than your grandchildren inheriting some of your money when you die.
If you set up a trust for gifting money to grandchildren, you would be in control of how much money your grandchild received, and when. It is important to note that trusts are not the same as regular gifts, so you are much more likely to have to pay inheritance tax.
5. Making pension payments
If your grandchild has a pension already, you could make direct contributions to this for them. This is a great way to help them access a stable future. However, it would not be helpful to them until they were able to access their pension at retirement age.
If you are gifting money to grandchildren to help them with rent payment, education fees, or other similar milestones, pension payments would not be suitable.
Another idea is to appoint your grandchild as a beneficiary of your pension plan, as they will usually not have to pay inheritance tax on the money they inherit from your pension. This is ideal if you have lots of money saved in your pension, and your grandchild does not need money urgently.
6. Making your grandchild a beneficiary of your life insurance policy
This method works similarly to the above idea. You simply select your grandchild as a beneficiary of your policy, and they then inherit the money that is released by your insurance company when you pass away.
They would usually not have to pay inheritance tax on this money.
7. Purchasing premium bonds
Finally, one of the less common ideas is to buy premium bonds for your grandchild. This is not ideal if you are hoping to help them with something specific, but it can provide them with a great opportunity to receive money.
Every month, your grandchild will have the opportunity to win up to £1 million worth of tax-free prizes.
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Tips For Gifting Money to Grandchildren
Below, we offer some tips for gifting money to grandchildren:
1. Make a note of the money you have given
If you keep a record of the money you have gifted to your grandchildren, it will make the inheritance process much easier for them when you pass away.
You should write down which grandchildren you have given money to, how you have given this money (e.g., lump sum of cash, payment into their ISA), and how much money you have given.
2. Find out whether they are claiming means-tested benefits
If your grandchild is claiming means-tested benefits, they may lose out on some of these benefits when they receive a payment from you. You would have to discuss this with them to ensure they do not unexpectedly lose part of their regular income.
The maximum limit for someone claiming means-tested benefits is £16000, so if you give them more money than this, they would lose their benefits entitlement (except for non-means-tested benefits).
3. Do not make a rash decision
The most sensible thing to do is sit with the idea of gifting money to grandchildren, research your various options, and seek advice from both financial experts and trusted loved ones. If you rush into the decision, you may end up selecting a limiting option, which would be disappointing as you want your money for your grandchildren to stretch as far as possible.
What Happens If My Grandchild Lives Abroad?
If your grandchild lives abroad, the gifting rules are likely to be different. The specific rules depend on the country that your grandchild is in, so make sure you research the laws in the appropriate country.
Usually, your best option is to send money to your children, and ask them to put it into a savings account that they already have for your grandchild. This ensures the gifting is above board, as you can easily get into trouble if you try to organise your grandchild’s finances yourself.
Differences Between Gifting Money to Grandchildren and Children
There are different tax implications involved in gifting money to grandchildren vs children, which is something to consider when you are working out how best to provide for your family financially.
For example, if you are gifting money for a civil partnership or wedding, you are allowed to gift up to £5000 to your child without paying tax. This is on top of the standard £3000 limit per tax year. On the other hand, you can only give up to £2,500 tax-free cash to your grandchild who is getting married or getting a civil partnership.
Furthermore, as we have mentioned, you are not permitted to open a savings account for your grandchild, whereas you are allowed to do this for a child. However, if the parent consents to opening an account for your grandchild, you are just as entitled to contribute money to it as the parent is.
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What Happens If I Want to Gift Money But My Retirement Funds are Low?
If you want to support your grandchildren but you cannot currently afford to do this, you have a few options.
Firstly, if you are well enough, you could find a job and start saving specifically for your grandchildren. If your retirement funds already safely cover your living costs, this could be your best bet.
If you like the sound of this but you struggle with your health, we would recommend trying out part-time volunteering first to see whether it would be feasible for you to commit to a part-time paid role.
Secondly, you could downsize, which would release money for you to gift to your grandchildren. This could help you with household tasks, as living in a smaller home makes everyday maintenance much easier. This option does come with the cost of a house move, so you would need to factor that into your budget.
Finally, have you ever considered equity release as a way to boost your retirement income? If you qualify for equity release, you could borrow money against your property, and gift some of this to your grandchildren.
If this is something that interests you, contact us on 0330 058 1579 and we will explain how equity release works, and how it could improve the future of your grandchildren.
Seeking Financial Advice
If you are thinking about gifting money to grandchildren, please seek financial advice. It is not advised to try to figure out the laws and loopholes on your own, as the risk of getting into legal trouble is far too high.
Speak to a qualified solicitor who will help you to calculate how much money you can afford to give away, decide how to divide up the money between children and grandchildren, and choose the best route for gifting money to grandchildren.
References
[1] Gifts and exemptions from Inheritance Tax https://www.moneyhelper.org.uk/en/family-and-care/death-and-bereavement/gifts-and-exemptions-from-inheritance-tax
[2] Junior ISAs https://www.moneyhelper.org.uk/en/savings/types-of-savings/junior-isas#:~:text=The%20Junior%20ISA%20limit%20is,be%20returned%20to%20the%20donor.
[3] Repaying your student loan https://www.gov.uk/repaying-your-student-loan/what-you-pay
