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