Inheritance Tax  

How much can clients gift children and grandchildren tax free?

“Using a discretionary trust gives grandparents the greatest flexibility and control, but the taxation is higher and more complex.”

Larger gifts

If an individual wants to gift larger sums, these will not be counted for IHT purposes if they live for seven years afterwards. 

Article continues after advert

If they do not live for the full seven years, the money they have given will be added to the value of their estate, eating into an individual’s £325,000 threshold.

However, Holt pointed out that an individual is unable to set any part of a tax-free allowance previously inherited from a spouse or partner, or the tax-free allowance (up to £175,000) associated with gifting the family home to children or grandchildren, against these lifetime gifts.

“If you have used all of the available IHT allowances, the gift will be taxed at up to 40 per cent, although the amount of IHT to be paid may be reduced based on how many of the seven years have been passed since the gift was made,” Holt explained.

Think about pension savings

With pension freedoms, individuals aged 55 or over, can access their pension savings and will usually get 25 per cent of the pot tax-free. 

Holt said this means they could consider using some of their tax-free lump sum as a gift to their loved ones, but she warned that individuals need to make sure they have enough savings to last them throughout retirement too.

The gifter could also consider nominating a family member as a beneficiary so that their pension plan could be passed on to that family member.

Holt explained that a pension plan is not usually considered part of an individual’s estate, so the beneficiaries will not pay any IHT on it -  although they could pay income tax on anything they chose to withdraw if the gifter were to die after the age of 75.

But as this does not apply to all pension plans, Holt recommended checking this with the provider.

Make use of a children's bank account 

“Bank accounts are practical and easy for family and friends to pay money into and are ideal for smaller amounts of cash.

“However, remember that interest earned in bank accounts is usually low and inflation can eat into any returns, so it’s worth keeping an eye on this,” Holt said. 

Unless covered by an exemption, any gifts in this form will also be outside of the individual’s estate in seven years.

Gifting to a grandchild versus gifting to a child 

Holt highlighted that there are a number of differences in what can be given to children and grandchildren tax-free:

  • Gifts worth up to £2,500 in a year can be given to a grandchild or great-grandchild (on top of your annual exemption) if they are getting married – but this increases to £5,000 if it's the gifter’s child.
  • As a grandparent you cannot open a Jisa for your grandchild – that must be done by the child's parent or legal guardian.
  • If you are a parent making a gift to an unmarried child under 18, and that gift earns interest or pays dividends above £100 in any tax year, all income from the gift will be taxed as if it were the gifters. This is to stop parents trying to get a tax break on their own money by using their children’s allowances. (This rule doesn’t apply to grandparents or to gifts from parents to their children’s Jisas.)

According to Matrix Capital’s founder and financial planner, Robin Melley, it is a good idea for individuals to keep a record of all gifts to ensure a full and accurate disclosure when the time comes for a statement of estate.