This article was last updated on 26/04/2024
The relationship between grandparents and their grandchildren is one of the most special, and grandparents often see it as their role to spoil their grandkids rotten. Whether that’s with sweets and toys when they’re young or with money when they’re older, there’s no questioning a grandparent’s devotion.
But before grandparents let their generosity get the better of them, there are some important tax considerations. If you’d like to give money to your grandchildren above and beyond the usual pocketmoney and birthday and Christmas presents, here are seven of the most tax-efficient ways to provide financial support.
1. Contribute to a Junior ISA
A Junior Individual Savings Account (ISA) is a long-term, tax-free savings account specially designed for children. While grandparents can’t set this up for their grandchild themselves (unless they have parental responsibility for the child), they are free to contribute to it within the child’s annual limit of £9,000 (2024/25). Options include a cash Junior ISA and a stocks and shares Junior ISA, which can’t be accessed until the child turns 18.
2. Gift up to £3,000 a year, every year
Each tax year everyone can give away up to £3,000 worth of money gifts without their value being added to an estate or incurring gift tax. This ‘annual exemption’ is usually more beneficial than the small gifts allowance of up to £250 per person as you’re unable to give gifts worth both £3,000 and £250 to the same person.
Another good thing about the annual exemption is that if you don’t use the full £3,000 in one year, you can carry it forward, but it must be used in the next tax year or you’ll lose it.
3. Consider a larger gift, if the circumstances are right
You can, of course, always gift cash worth more than £3,000 to your grandchild in a tax year, however it may be subject to inheritance tax if you die within seven years. If you’re a young grandparent or are in exceptional health this ‘potentially exempt transfer’ could be worth considering, especially if you don’t have a large enough estate for inheritance tax rules to apply. There’s usually no inheritance tax to pay if the value of your estate is less than £325,000 or if you leave everything to your spouse or civil partner.
However, if you do pass away within the first three years of giving a large money gift and you exceed the inheritance tax threshold, 40% will be charged on such gifts. If you die within three to seven years of giving the gift, inheritance tax will be charged on a sliding scale known as ‘taper relief’.
| Years between gift and death | Tax paid |
|---|---|
| less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
4. Splurge on a wedding gift
In addition to the annual exemption on gifts, a grandparent can also give a wedding or civil ceremony gift to the value of £2,500 per grandchild. While this may not be so relevant for grandparents with younger grandchildren, it’s a good ace to have up your sleeve when the time comes.
5. Contribute to a child’s pension
Just like a Junior ISA, parents and legal guardians can set up a pension for a child which will automatically pass to them once they reach 18. Anyone can contribute to a child’s pension to a maximum of £2,880 a year, which the government tops up to £3,600 thanks to tax relief (2024/25).
Although it may seem like a long time until your grandchild will benefit, paying into a pension is a great way to ensure they have financial security for their entire life. It can also encourage grandchildren to prioritise their pension and start saving from an early age, once they start working. And with the benefits of tax relief and compound interest, which can turn a small savings pot into a significant amount when left untouched, it’s one of the most tax-efficient ways to save for their future.
6. Make sure you pass on your pension
Before you die you can determine who stands to inherit your pension by telling your pension provider the names of your beneficiaries. You can nominate as many people as you want and can choose how much you want each beneficiary to have. Naming your grandchildren is a great way to ensure they receive some of your money after you’ve gone. And, as pensions are considered to sit outside your estate, your beneficiaries won’t have to pay any inheritance tax.
It’s worth remembering that your pension won’t always pass to your beneficiaries though, and this will depend on how old you are when you die, whether you’ve started drawing your pension and the type of pension you have. You can find out more in our ‘pension rules after death’ article, and add your beneficiaries in the Account section of your BeeHive if you’re a PensionBee customer.
7. Keep your will updated
While it can be morbid to think too long about what will happen to your money and possessions after you die, writing a will is really important if you have specific wishes. If you don’t write a will, and have it validated, your money, property and possessions will automatically go to your next of kin such as your spouse or civil partner or the next closest relative after that. In such a scenario grandchildren can often be overlooked.
Just as important as it is to create a will, it’s also important to keep it up to date. Making sure you add the name of each new grandchild can make the process of dividing your estate much more straightforward after you’re gone. If you want something specific to go to a particular grandchild, such as a sum of money towards their first car or first home, it’s a good idea to write it down.
Risk warning
This information should not be regarded as financial advice. As always with investments, your capital is at risk.
