Gifting money to grandchildren - the rules you need to know
May 25, 2021
Gifting money to grandchildren and all the tax rules associated with it can seem intimidating, but you don't need to pay for a financial adviser to know the basics. Simply put, if you can prove the gift (payment) doesn't impact your day to day standard of living then you're likely to be OK. For your peace of mind we've taken a look at the gifting and inheritance rules below.
Table of contents
- Regular gifts and payments
- Annual gift allowance
- Small gifts & one off gifts
- How to gift to grandchildren
Regular gifts and payments
Before you read the rest of this article, you might be able to get the answer you're looking for from this one section. Simply put, any gifts that are made using your surplus income are also exempt from tax. However, you must be able to prove that these gifts are not coming from your savings and that giving these gifts doesn't affect your standard of living.
Here are two steps to help you figure out how much you can gift through regular financial gifts.
- Calculate your total income which for the purposes of inheritance and gifting tax includes the following: earnings from employment and pensions, interest, dividends and rental income.
- Calculate your surplus income (i.e. any remaining income you have after of your regular outgoings and bills have been paid)
Once you've done these first 2 steps and figured out that you can make regular gifts, it's important to make it the right way. Very simply put, you need to prove that these gifts form part of your "normal expenditure".
This is best done by setting up a standing order, paying it on a regular basis, and effectively treating it like any other regular payment you make (i.e. part of your normal expenditure).
Regularity can mean different things in this case - weekly, monthly or even quarterly. It's the act of setting up the standing order that's the important thing as that helps show HMRC that the gift is planned to occur regularly and is not a one-off.
HMRC also recognise that your income may be variable (e.g. dividend or rental income), and some costs that you may be helping with (e.g. school fees) may also vary from term to term. With this in mind, the amount you gift can also be variable and react to changes in your lifestyle.
If this section covers your case then great, but if you don't think you have the surplus income to make regular gifts, then continue reading.
Annual gift allowance
Every person in the UK has an annual tax-free gift allowance that they can use to gift lump sums of money to anyone they want. For this 2021/2022 tax year, the annual tax-free gift allowance is £3,000. This annual allowance enables you to give money to your grandchildren (or anyone else) without worrying about any inheritance tax.
On top of this, if you don't use you annual gift allowance, you can carry it over to the following year. So for example, if you made no gifts in the last tax year, then you'll be able to give your grandchildren up to £6,000 this year without worrying about inheritance tax.
Here's a few extra things to note about the annual gift allowance;
- It's a total personal allowance which means you can't give away £3k to every grandchild you have.
- You can split the allowance between as many people as you want (e.g. £1k to 3 different grandchildren)
- It's a per person allowance so if you have a partner, they will have their own £3k allowance. Remember you can gift as much money as you want to spouses & civil partners (if they're in the UK) so this is a good way to make sure you're efficiently using your allowances
Small gifts and one-off gifts
As well as your annual gift-allowance each tax year you can also give away "small gifts" and wedding gifts.
Small tax-free gifts can be anything such as Christmas presents, birthday presents but can also be given on no occasion. These tax-free gifts can only have a value of up to £250 with the following three things to remember
- You can not give a "small-gift" to people who have already received some or all of your £3,000 annual gift allowance
- You're allowed to give "small gifts" to as many people as you want
- You're not allowed to exceed £250 for any one person as part of your "small-gift" allowance
Wedding (or civil ceremony gifts) are what they say on the tin - a gift for those getting married. The amounts you can gift under this tax rule depend on who the gift receiver is;
- £5,000 for a child getting married
- £2,500 for a grandchild or great-grandchild
- £1,000 for any other person
You can use a wedding gift on someone you've already gifted through your annual gift allowance or your small cash gift allowance.
How to gift to grandchildren under 18 years old
Gifting to grandchildren (under 18s) can sometimes require a little more care then gifting directly to children. This is because the grandchild is unlikely to have their own bank account and depending on the gift you're making (regular, small cash, wedding, annual gift) it may be important to pay directly into the account of the gift recipient and not their parent.
This is where Junior ISAs and Bare trusts can come really handy. These accounts are in the grandchild's name and allow anyone to contribute directly to them (without needing to send the money to the parent first).
At Hapi, we've made this even simpler by allowing grandparents to leave a message and a picture with every gift/contribution they make to their grandchild. These messages and pictures get stored in the Hapi app for the grandchild to see when they turn 18 and receive the money.
Interested in this? Leave your details, and those of the person you wish to tell about Hapi, and turn those cold cash gifts into long lasting memories for your grandchildren.
This article should not be read as personal financial advice and is written solely to provide guidance to the reader. The exact tax treatment depends on your individual circumstances and may be subject to changes in the future. When investing, your capital is at risk and the value of your investment may go up as well as down.