The rules to remember when gifting money to your grandkids

2 minutes

If you want to give money to your grandchildren, read these tips first to limit tax liability and the risk of family fallouts.

Financial writer Felicity Hannah (@FelicityHannah) has asked the financial experts for their money-sharing ideas.

  • Many grandparents provide support to their families
  • It’s important to consider the potential tax bill
  • Communication is crucial when it comes to gift-giving

When should you help your grandchildren?

If you’re a grandparent who wants to provide financial help to your grandchildren you’re not alone.

Research from Gransnet shows that many grandparents give their families support, both financial and practical.

Almost a third of grandparents pay for uniform and clothing, almost a quarter give their grandkids pocket money, and a fifth contribute to their long-term savings.

The UK has plenty of devoted grandparents who want to help their grandchildren enjoy every opportunity. But if you do want to help with money it’s important to look at the best ways to give financial help.

When to give to grandchildren

Help from grandparents can be a steady allowance or as a lump sum, depending on the situation.

Ben Cordiner (@BenCordiner), Co-Founder & Financial Adviser at Cordiner Wealth (@CordinerWealth), says that the grandparents he talks to are often keen to help with university expenses, and that many want to make more substantial gifts to help grandchildren buy first cars and first homes.

‘We’ve also seen grandparents make contributions to their grandchildren’s financial futures by making payments to investments, such as Junior ISAs,’ he reveals.

Ben believes this is a particularly good way to gift to children as the money is protected from being withdrawn until the child is an adult.

Inheritance tax and gifts to grandchildren

Grandparents need to be aware of the tax implications on gifts so that their grandchildren don’t find themselves saddled with a large tax bill later on.

‘The best way to give is to utilise your annual gift exemptions of £3,000,’ explains Ben. ‘This amount is immediately outside of your estate for inheritance tax purposes. Next, use the small gifts allowance of up to £250 and, when the time comes, exemptions linked to weddings.’

Parents and grandparents get a £2,500 exemption for their grandchild or great-grandchild’s wedding – a good opportunity to help a happy couple.

‘Further gifts can be made from income, which, if you can demonstrate that you would otherwise not need them, are also excluded from your estate when calculating inheritance tax,’ he adds.

Gifts over and above those amounts will remain liable for inheritance tax for seven years. Read the government's official guidance on inheritance tax for more information.

As well as being your inheritor, you can also make your grandchild the beneficiary of your life insurance. By creating a trust, you can secure finances for your grandchild’s future, even when you are no longer there to support them.

Helping grandchildren buy a house

‘Grandparents should always keep comprehensive records of the gifts they have made,’ urges Damien Clyburn (@Damian_Clyburn), Director & Financial Planner at Otter Financial Services. ‘The people dealing with their estate can then understand what payments were made and calculate the inheritance tax bill.’

It’s also important to think through all the possible outcomes of giving a more substantial gift.

‘Grandparents should remember that their grandchildren’s circumstances may change, which could affect where the gift ultimately ends up,’ he adds.

‘This is particularly relevant when considering a house deposit as a gift. If the grandchild splits from their partner and the house is sold, the equity may be split between the grandchild and their estranged partner. That’s probably not what the grandparent originally envisaged when the gift was made,’ explains Damien.

The emotional considerations of giving

One last thing to consider is that when money and family are involved emotions can run high. That’s particularly true for grandparents who want to provide help to their grandchildren but not all at the same time, or perhaps even not to all their descendants.

Sometimes their children may feel that they should have received direct help rather than the grandchildren. It can be a difficult situation for the grandparent who wishes to help their grandchild.

Jane Robey, the chief executive of the National Family Mediation (@NatFamMediation) organisation in England, says that the best thing to do is to be even-handed. Where that is not possible, it’s important to talk.

‘Communication is crucial,’ she urges. ‘While money matters are private, you don’t want to set up secrets. What you ideally need is a relationship where there’s a degree of trust and integrity so that those who are not receiving can understand and be compassionate about the reason the other is receiving.

‘There are always ups and downs, but the key to maintaining good family relations is to talk, listen and not be too judgemental of how people feel.’

For a grandparent, providing financial help to beloved grandchildren can be a real joy. However, there are important considerations to ensure that any gift is not subject to tax being clawed back at a later point. It’s also essential to make sure the amount being gifted is affordable. Taking a little extra time to ensure that any gift is tax efficient and will not cause any upset means that nothing negative will come out of a positive action.