Grandparent-grandchild relationship is often one of the strongest, most meaningful bonds there can be, with grandparents being known to shower their little ones with love and presents. That said, in order for that generosity to not have any negative consequences tax-wise, it is important to know how best provide financial support without incurring too much tax liability.
How much money can Grandparents gift?
By providing funds to help cover such sizable costs as university fees or house purchase deposits, Grandparents can often make a huge and lasting impact on their loved-one's futures – but there are also long-term benefits from a financial perspective for donors too.
The current Inheritance Tax (IHT) exemptions rules allow up to £3,000 in any one tax year per grandparent to be exempt from IHT liabilities; if they don't gift it all that same year then the remaining balance is moved forward into next year's allowance, however, unused allowances are lost after this period and cannot roll over further.
Additionally, as long as the beneficiary is a new individual each time, you are allowed to give an unlimited number of modest £250 presents in each tax year. Additionally, presents given in honour of a grandchild's (or great-grandchild's) wedding or civil partnership are exempt from tax up to the amount of £2,500; if your own child is getting married, the exemption rises to £5,000 instead.
Alongside providing for your grandchildren, you can also offer your children up to £3,000 in tax-free gifts in a single tax year. This is referred to as your yearly exemption. In theory, you are free to give as much money as you like to your children or other family members, but in order for the gift to be tax-free, you must live for at least seven years after the date it was made. This is a Potentially Exempt Transfer (PET), sometimes known as the seven-year rule for gifts. When giving money to children, keep in mind that Capital Gains Tax may still be owed.
What is a Potentially Exempt Transfer (PET)
A Potentially Exempt Transfer (PET) enables a person to make donations or gifts of any amount that will be exempt from IHT if that person survives for a further seven years.
If they don't survive that period, the PET is added to their estate's value for IHT purposes as a Chargeable Consideration. If the total value exceeds the IHT threshold, IHT may be owed.
A retrospective charge is made if the donor passes away within seven years of the PET's completion date. In this instance, subject to Taper Relief, tax will be owed on the value of the PET as of the actual date it was made, based on the donor's seven-year cumulative total but using the applicable death rates at the time they died.
How does Taper Relief work?
Taper Relief reduces your Inheritance Tax bill if the donor survives at least three years. The amount of relief depends on how long after gifting the person remains alive, and it is calculated as follows;
- 0-3 years between the gift being made and death = 100% of full charge at death rates
- 3-4 years = 80%
- 4-5 years = 60%
- 5-6 years = 40%
Though taper relief offers a degree of tax savings when making lifetime transfers, the full value is still included in any calculations regarding Inheritance Tax (IHT) on an estate. IHT is charged at 40% for estates valued over £325,000 – meaning it's important to factor in the entire gift amount while planning ahead.
Lifetime transfers
You will be subject to tax at the lifetime rate of 20% whenever the sum of your chargeable lifetime transfers over the previous seven years exceeds the £325,000 IHT level.
The 'transferor,' in this example, the grandparents, is subject to tax; but, the transferee (the grandchildren), could also be liable for payment. Who pays the tax has an impact on the amount paid.
Tax is due six months after the end of the month in which the transfer is made; if the transfer is done after 5 April but before 1 October in any year, the due date is the end of April in the next tax year.
Capital Gains Tax
Capital Gains Tax (CGT) may apply any non-cash gifts such as material possessions or shares sold after they're received – though cars and homes excluded from this rule. It's also possible for Inheritance Tax and CGT to both affect one transaction.
Put simply, when you sell an asset that has increased in value, any profit made is subject to Capital Gains Tax. For instance, if you purchased something for £1,000 but were fortunate enough to find a buyer who was willing to pay three times the original price – your gain would be taxed with this levy and not on the amount of money received from selling it. Those profits won't incur taxation until they exceed the annual threshold .
However, if you disclose losses to HMRC (known as allowable losses), you can lower your taxable gains. Be mindful though, that unless you offset the loss with a gain from the same person, you cannot deduct losses when giving property to family members. This rule applies to gifts given to "connected people," such as children and grandchildren, as well as to siblings, sisters, parents, grandparents, other relatives, and business partners.
An effective way to reduce tax burden on your estate is by gifting property to your children or grandchildren, as this can raise their tax-free threshold up to £500,000 for estates worth less than two million.
Other methods of gifting to be considered
There are several other notable tax-efficient ways of supporting your grandchildren's futures, over and above straightforward cash transactions, contributions to marriage, or gifting assets, such as;
- Contribute to a Junior ISA
A Junior ISA is an ideal way for grandparents to provide for their grandchildren. This long-term savings account offers tax-free benefits and allows them to contribute up to £4,260 per year in either cash or stocks & shares, only giving the youngster access once they reach the age of 18.
- Contribute to a child's pension
A pension can be established on behalf of child by their parents or legal guardians, and anyone can contribute up to a maximum of £2,880 per year, which the government will match up to a maximum of £3,600 through tax relief (2018–19). Such a pension will then automatically pass to the child once they turn 18.
In addition to being an effective method of safeguarding their long-term financial security, this could also encourage your grandchildren to prioritise their pension from an earlier age. It's also one of the most tax-efficient methods to save for their future because of the advantages of tax relief and compound interest, which, when left untapped, may increase a small savings account's value significantly.
- Pass on your pension
By providing your pension provider with the names of your beneficiaries, you can decide who will inherit your pension before you pass away. You are free to choose how much you want to donate to each beneficiary and how many nominees you wish to make. Furthermore, because pensions are regarded as belonging outside of your estate, your beneficiaries won't be subject to inheritance tax until April 2027 when the rules change. The rule changes are subject to HMRC consultation, the details of which are not yet confirmed.
However, it's important to keep in mind that your pension may not always be directed straight to your beneficiaries. This will depend on your age at death, whether you have begun taking your pension, and the sort of pension you have.
- Bills and fees
You may consider paying a child's educational fees, or costs associated with their hobbies or extracurricular activities. If bills or invoices are addressed directly to you, then these are considered to be your personal lifestyle costs rather than gifting from your estate, so will not be considered taxable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
