Gifting money to children and grandchildren explained
Last updated: 14/04/2022 | Estimated Reading Time: 6 minutes
While most people plan to leave their money to children and grandchildren after they die, increasing numbers aren’t waiting to pass on their wealth. According to financial advice provider The Openwork Partnership, six in 10 parents and grandparents intend to gift money to family members while they’re still living.
These early inheritances - averaging £9,500 for each child and grandchild - are to commemorate special occasions, cover education and expenses, and, overwhelmingly, to help the recipients purchase homes. As house prices have risen, the practice has become so common that the “Bank of Mum and Dad” is now the UK’s ninth-largest mortgage lender.
For many people, gifting money while they’re living is a means of avoiding some inheritance tax, which is levied at 40% on the value of an estate over £325,000. But gifts can also be taxable, and you’ll have to be savvy to avoid paying unnecessary tax when bestowing money on your loved ones.
Under HMRC rules, everyone is allowed to gift a certain amount of money within certain time frames without it being taxed. But above those thresholds and outside of those circumstances, gifts are taxed like estates to ensure people don’t use them to entirely evade inheritance tax.
In general, gifts to children and grandchild are tax-free if:
Otherwise, money you directly give to anyone other than your spouse or a charity is subject to gift tax, which can be up to 40%.
Gift tax is levied by HMRC on financial gifts to people in circumstances that aren't tax-exempt.
Gift tax is basically a form of inheritance tax. The gift tax rate can be up to 40% if you die less than three years after giving the money - the same rate as inheritance tax. But the exact tax rate depends on when you die, with the tax paid retrospectively after your death, under the rules about potentially exempt transfers.
You can gift money to your children and grandchildren without it being taxed in the following circumstances:
Other gifts to children or grandchildren are potentially exempt transfers. If you die within seven years of handing over the money, it will be considered part of your estate and taxed accordingly. But if you live beyond that, the money won’t be taxed.
Potentially exempt transfers are money you hand over to people who aren’t your spouse or civil partner, and that may be subject to tax in the future, depending on when you die.
If you die more than seven years after gifting the money, it won’t be taxed.
But if you die before then, the money will be considered part of your estate and taxed accordingly. But how much tax is levied depends on when the gift was made and when you die - a mechanism called taper relief.
|Tears between gift and death||Tax rate|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
If the gifts end up subject to taxation, the tax will be retrospectively collected from the recipients after your death.
The rules around potentially exempt transfers exist to prevent people from giving away their money just before their death, or upon receiving a terminal diagnosis, in order to evade inheritance tax.
But remember that estate inheritance is only levied on the part of your estate over £325,000. So your beneficiaries won’t have to pay tax on previous gifts, unless those gifts and your estate total more than £325,000.
There are some other workarounds to gift and inheritance tax: