How can your parents gift money to your child?
Many grandparents want to give money to their grandchildren but there are different rules, related to tax that they need to abide by. This article will look at the different ways you can gift money to grandchildren and what rules you need to consider when doing so.
Once you’ve gained a good understanding of what you can afford to give, who your recipients will be, and why you want to gift money, then you can consider what you can and can’t do. The Rules are tax related, and so can seem complicated so let’s try to simplify matters.
Firstly, understand your inheritance tax position:
If you think your estate, or share of a joint estate, will be less than £325,000 threshold then no inheritance tax will be due to pay.
So, it is only if your estate is worth more than the threshold inheritance tax would be triggered on any gifts you have made. Remember that gifts are consider to be items of value, so its not only cash you must bear in mind when working out how much you have given in a particular year.
The standard rate of inheritance tax is 40% charged on the amount of your estate over the threshold.
Secondly, understand how much you can gift, exempt of Inheritance Tax:
You can give away up to £250 per person each tax year as small gifts, as many times as you like (provided you have not used up any other gifting allowances for the person). Normal gifts such as birthday and Christmas presents.
You can give away £3000 per tax year without this being added back to your estate upon death.
Each tax year you can also give away wedding or civil ceremony gifts of £2500 for a grandchild or £5000 for a child.
Payments to help with the living costs of a child who is under 18.
A general principle is that you must be able to maintain your standard of living after having made the gifts.
So if I had to pay Inheritance Tax how does it work?
If your estate is worth more than £325000 and you had made gifts in previous tax years which were not exempt as describe above then tax is due as follows:
- Less than 3 years between gift and death = 40% tax to be paid
- 3 to 4 years between gift and death = 32% tax to be paid
- 4 to 5 years between gift and death = 24% tax to be paid
- 5 to 6 years between gift and death = 16% tax to be paid
- 6 to 7 years between gift and death = 8% tax to be paid
- Over 7 years between gift and death = 0% tax to be paid
Please remember tax rules can change and the above, whilst correct at the time of writing may change in the future. Always check the latest rule.
Ways of gifting money to grandchildren
Once you understand all of the above, you’re ready to choose the practicalities of how to gift money to your grandchildren. Look beyond poor return bank accounts. Some products to consider include:
Junior ISAs (JISA): usually run by banks and building societies, these are cash, stocks or shares saving plans for under 18’s. For current allowances on what you can pay in see here. At Shepherds Friendly Society, you can open the plan if you are the parent or legal guardian of the child, and we’ll accept contributions from anyone who wishes such as from family members and friends. Therefore, grandparents can’t open the plan but they can pay into it.
Young Saver Plan: this is Shepherd’s Friendly’s unique product that allows grandparents to open a plan for their grandchild to save for a minimum period of 10 years. It is tax-efficient and you can make monthly gifts of between £7.50 and £100. The beauty of this product is that we do the hard work of investing in a mix of assets for you, so that your grandchild gets the return on their investment with no income tax or capital gains tax on the growth of the savings. However, you should consider that, as this is an investment, returns are not guaranteed. Remember, when taking out any investment product your capital is at risk and you may get back less than you have put in. All references to taxation are to UK taxation and are based on Shepherds Friendly Society’s understanding of current legislation and H M Revenue and Customs practice which may change in the future.
Find out more about Shepherds Friendly’s Junior ISA...
*Remember: When investing, your capital is at risk.
In poor investment conditions we may apply a Market Value Reduction (MVR).
Please seek independent advice on any financial product and inheritance tax advice.