Making tax-efficient gifts to grandchildren

Inheritance and estate planning
Views & insights

Gifting money directly to grandchildren could boost their financial security and prove more tax efficient. Here’s why.


31 May 2024 | 3 minute read

Gifting money directly to your grandchildren could give them a valuable financial headstart to life as an independent adult. It could also be a tax-efficient way of passing on wealth to the next generation by helping to mitigate your estate’s inheritance tax (IHT) liability.

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Despite these potential advantages, our research1 of 7,000 people – 2,000 of whom were over-55 with children, and 5,000 of whom were under-55 with living parents – found that only a quarter of parents with £1m+ in savings and investments would consider ‘skipping a generation’ and passing money straight to their grandchildren. In contrast, two-fifths of children who were higher earners said they would be happy for their parents to do this.

Why give money to grandchildren?

Young people today face a difficult financial future. University tuition fees have topped £9,250 a year2, and the average UK house price stood at £282,776 in March 2024 – that’s 57% higher than a decade ago3.

These challenges mean that gifting money directly to grandchildren could make a bigger difference to their financial security and quality of life than if they were to wait for it to trickle down via their parents. When we asked our survey respondents when they wanted financial help, nearly two-fifths of those aged 18 to 24 answered ‘now’ – far higher than among the older age groups.    

How to gift money tax efficiently

While it’s possible to leave money to grandchildren through your will, this might be one of the least tax-efficient ways to pass on wealth. It could also come too late to make a meaningful difference to your grandchild’s life.

There are several ways to pass on wealth to grandchildren while you’re still alive. If done correctly, it could help to mitigate IHT by reducing the size of your overall estate. The option that’s right for you will depend on a range of factors, including how old your grandchildren are, whether you want to offer support for specific goals (such as education fees or a house purchase) and your individual circumstances. Each option is also treated differently when it comes to inheritance tax, so it’s important to speak to a financial or tax adviser before getting started.

Junior ISAs and bare trusts

If your grandchild is still young, investing in a Junior ISA is a great way of building up money for their future. Only parents or legal guardians can open a Junior ISA, but anyone can contribute, so long as those contributions don’t exceed £9,000 a year.

Another option is to hold assets on behalf of your grandchild in a bare trust. There are no investment limits, and the money can be used for the child’s benefit before they turn 18, under limited circumstances, such as towards school fees (but returns may be taxed). If money or investments are put into a bare trust by grandparents (or anyone else who isn’t the child’s parent) the contents are taxed as if they belong to the child, which may mean there is little or no tax to pay on income or gains.

Once your grandchild turns 18, they can use the money in a Junior ISA or bare trust however they wish.

If you make regular gifts into a Junior ISA or bare trust, these might be classed as ‘normal expenditure out of income’ and therefore be exempt from inheritance tax. To qualify, the payments must be regular, form part of your normal expenditure, be made out of your income, and not affect your normal standard of living. The rules around this exemption are strict and it’s important to seek advice.

Lifetime gifts

If your grandchild is older and has more immediate financial needs, you might want to consider making outright gifts. Each year, you can give away up to £3,000 worth of gifts without these being added to the value of your estate for IHT purposes. You can also give up to £2,500 to a grandchild who is getting married or starting a civil partnership.

If you want to make a larger financial gift – perhaps to enable your grandchild to get onto the property ladder – this is known as a potentially exempt transfer, and you must live for at least a further seven years for it to be IHT free.

Gifts out of surplus income

The ‘gifts out of surplus income’ exemption is a powerful way of making IHT-exempt gifts and avoiding excess income build up in your estate to create a future IHT liability. These types of gifts can be particularly useful for paying recurrent expenditure, such as grandchildren’s school fees. However, the gifts must meet certain conditions:

  • They need to form part of your normal expenditure and conform to an established pattern.
  • They must be made from your after-tax income (not capital).
  • The gifts leave you with sufficient income in order to maintain your standard of living.

Use your excess income to buy a life assurance policy

If you have surplus income, you could also consider using it to fund a whole-of-life insurance policy, which is paid out on death and can provide a means for your beneficiaries to pay some of your estate’s inheritance tax bill. This can help you pass on more of your estate to your loved ones following your death. These should be structured to make them IHT exempt, and tax advice should be sought.

Next steps

It can be difficult knowing how to give money to your family in a way that is not only tax efficient, but also offers them the best chance of a secure financial future. That’s where getting some advice can help. A financial adviser will take the time to understand your family’s unique circumstances and build a plan that suits your needs and wishes.

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The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

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