Avoid the grandparent tax trap

Millions of grandparents are investing on behalf of their grandchildren – but experts warn that many may not realise the tax implications.

Each year, you can give up to £3,000 without incurring a potential future charge – but this is the total amount, not the amount that can be given to each grandchild, although there are exceptions such as wedding presents.

Mark Giddens, a partner at the accountancy firm UHY Hacker Young, said: “Gifting to children and grandchildren makes sense for a lot of people looking to reduce inheritance tax bills, but they need to be careful.  Many may not realise the limits to how much they can give each year to avoid a potential tax charge.”

Many assume that junior ISA’s are also tax-free.  This is not correct.  It is tax-free for their grandchildren when they want the money from the age of 18, but it is not necessarily tax-free for those putting the money in.

Inheritance tax applies on the value of an estate – including cash, shares and property – above £325,000 or £650,000 for a couple.  If the total assets are valued above this threshold, which has been frozen since April 2009, then a 40% tax charge will apply on the total above this amount.

Tax on Gifts from Grandparents

You can give up to £250 a year to as many people as you like for the gift to fall outside your estate immediately.

If you pass more than this amount to an individual in a given tax year – even by a penny – the whole sum will go towards your annual tax-free £3,000 gift allowance.

If the £3,000 is not used in full, the excess can be carried forward for one tax year.  That means you could give away £6,000 in one tax year if you did not use any of your allowance in the previous year.

If you gift more than £3,000 in one tax year, you have to live for at least seven years for the amount above the allowance to fall outside your estate.  If you do not live for seven years, the sum that you gave away over the threshold will eat into your so-called “nil-rate band” – that is, the £325,000 that can be left to your loved ones before inheritance tax is charged.  There might be a taper relief depending on how long you live after making the gift.

There are exemptions.  You can contribute as much as you like from “surplus income” – money that you do not use for essentials such as bills and food shopping.

Wedding gifts are also exempt.  Each parent can give up to £5,000 to a child who is getting married, while a grandparent can give £2,500 and anyone else can give £1,000.


For further information, please see the original article in The Sunday Times 21/06/2015.

Hussain, Ali (2015). The Sunday Times. Pg 6.


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