It’s natural to want to shower your grandchildren with gifts and money, it can invoke a lovely feeling within you. But how can you go about it? Is there a limit to how much you can gift? When should you gift? And does inheritance tax affect anything?

In this guide, we’re going to be talking about all things gifting to grandchildren.

How much money can I gift to my grandchildren tax-free?

Gifts from grandparents can make a real change to grandchildren’s lives, but based on the current inheritance tax rules, it’s evident that it’s better to give little and often.

As a grandparent, you can gift up to £3,000 each tax year, inheritance tax-free. You can also make an unlimited number of £250 gifts in each tax year, but one individual can only receive £3,000 before being liable for inheritance tax. This £3000 is known as your annual exemption.

Inheritance tax and gift-giving

As you now know, you can gift up to £3,000 in assets or cash to loved ones each tax year. This sum of money can be given to one individual, like a grandchild, or split between several. It’s completely up to you and it’s completely tax-free.

Although we’re mainly talking about money, gifts can range from jewellery and antiques to property and stocks and shares. Perhaps you sell your car or house to a grandchild for lower than what it’s valued at, the difference in value would technically count as a gift, so it could be subject to inheritance tax.

You may have heard of what is known as the ‘7-year rule’. This involves you being able to gift more than £3,000 each tax year – but if you pass away within 7 years of giving these excess gifts, they may be subject to inheritance tax.

If you don’t gift your full £3,000 within one tax year, the remaining amount can be passed over to the following year, but it can not be carried over any further.

What is inheritance tax?

Here’s a quick explanation of how inheritance tax works:

When you die, if all of our assets that form our estate come to a value over £325,000, the current threshold, 40% of anything over this must be paid in inheritance tax. This will be paid to HM Revenue & Customs before anything is passed on to named beneficiaries.

However, if you leave anything to your surviving spouse after you die, this is free from inheritance tax. This means partners could potentially leave up to £1 million of inheritance tax-free money to their loved ones.

Unfortunately, it’s not just our estate that we leave in our Will that is subject to inheritance tax, even the gifts that you give to your grandchildren whilst you’re alive could be subject to inheritance tax once you pass.

Other tax-free gift options

Don’t fret, there is a kaleidoscope of other ways you can gift to your grandchildren that don’t fall subject to inheritance tax.

Each year, you can make as many gifts of £250 as you like per person. These are not considered as part of your estate, meaning they aren’t subject to inheritance tax. It’s important to note that one individual can only receive £3,000 worth of tax-free gifts without being hit with an inheritance tax bill later on.

When it comes to Christmas and birthday presents, there’s no need to worry as these are exempt from inheritance tax.

For those who have grandchildren who are getting married or entering a civil partnership, you can give them a wedding gift of up to £2,500 completely tax-free. This isn’t counted as part of the £3,000 annual exemption and it requires being given prior to the wedding or civil ceremony.

If you want to help your grandchildren with their day to day living costs, you can make regular payments to them. These are known as ‘gifts out of income’ as they must come from any surplus from your monthly income after you have paid all of your regular outgoings. These payments are to be made monthly and must not affect your standard of living. 

If you are looking to give your grandchildren a sum of money, you could buy premium bonds. These don’t earn any interest but it means they are entered every month into a draw to win up to £1 million in tax-free cash.

Can I name a grandchild as a life insurance beneficiary?

Although insurance providers won’t release their payout until they reach the age of 18, you can name your grandchild as a beneficiary on your life insurance policy.

Excluding your life insurance policy from your estate is a great way to avoid inheritance tax. To do this, your life insurance policy must be written in a trust and the payout can be used to help your grandchildren financially when you’re no longer around.

If you’re thinking about life insurance, get your quote from us today. At Bequest, we offer affordable life insurance policies to protect you and your loved ones. If you have any questions, drop us an email at alexa@bequest or message us. 

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