Many grandparents wish to support their children and grandchildren during their lifetimes – whether that be to help with school fees, assist with getting onto the property ladder or perhaps contributing towards a wedding.
It is important to have a clear understanding of how Inheritance Tax (IHT) applies to lifetime gifts made by grandparents, and how the available exemptions can be used effectively.
In this guide we review some of the common types of lifetime gifting options available together with the applicable exemptions.
Lifetime gifts and the seven-year rule
An outright lifetime gift made by any person, with no strings attached, is known as a Potentially Exempt Transfer (PET). While there is no limit in England and Wales on the value of lifetime gifts, such gifts may nonetheless be brought back into account on death and charged to IHT, depending on their timing and value.
(Generally, IHT is payable at 40% on the value of an estate above the £325,000 Nil Rate Band (or what is available of it), subject to reductions for exemptions including, but not limited to, transfers to a surviving spouse or charity, and the potential availability of the Residence Nil Rate Band.)
If you survive seven years from the date of the gift, it will fall outside your estate and is fully exempt from IHT.
If you die within seven years, the gift may be added back into your estate and IHT may become payable subject to the availability of the Nil Rate Band (although the tax, if payable, may reduce if you survive at least three years from the date of the gift).
This seven-year rule and the size of the available Nil Rate Band may affect grandparents who make significant gifts, such as lump-sum contributions towards a grandchild’s property purchase or simply passing funds down earlier rather than on their death via the terms of their will.
Key Inheritance Tax exemptions relevant to grandparents
There are several exemptions which permit lifetime gifts to be made within specified limits, free from IHT and without being brought back into account on death. These exemptions apply immediately, regardless of how long you live after making the gift:
– Annual exemption
You can give away up to £3,000 per tax year, either to one person or split between several recipients, without any IHT consequences. This allowance can be particularly effective where grandparents make regular gifts to multiple grandchildren.
If unused, the annual exemption can be carried forward for one tax year only, allowing up to £6,000 to be gifted in a single year.
– Small gift allowance
You can give up to £250 per person per tax year to an unlimited number of recipients, provided no other exemption is used for that individual in the same tax year. This exemption is often ideal for birthday or Christmas gifts to grandchildren.
– Normal expenditure out of income
This is one of the most valuable and frequently overlooked exemptions. It allows you to make regular gifts out of surplus income, with no upper limit, as long as:
- the gifts form part of your normal pattern of expenditure; and
- you retain sufficient income to maintain your usual standard of living.
This exemption is commonly used by grandparents paying school fees, funding childcare, or making regular payments to support grandchildren over time. For the latter, you can really maximise this allowance by paying the funds into a Junior ISA (Individual Savings Account), whether that be a cash Junior ISA or a stocks and shares Junior ISA, or a pension established for your grandchild.
– Wedding and civil partnership gifts
Grandparents can make tax-free gifts when a grandchild (or great-grandchild) gets married or enters a civil partnership, of up to £2,500 per recipient. This exemption can be combined with other exemptions (such as the annual exemption), allowing grandparents to gift a larger amount on such an occasion.
– Other exempt gifts
Gifts between spouses or civil partners (where both are UK-domiciled), as well as gifts to registered charities and political parties, are also exempt from IHT. While not specific to grandchildren, these exemptions can still form part of a wider estate planning strategy for grandparents.
Common issues for grandparents making gifts
Before making any gifts, it is important to consider carefully whether you can afford to do so, taking into account your future financial needs. This is particularly relevant if the proposed gifts are significant (whether a one-off gift or committing to regular, longer-term gifting such as helping with school fees).
It is also important to note that the Nil Rate Band is applied to lifetime gifts in the order in which they are made. If IHT becomes payable on a gift, the initial liability falls on the recipient, which in some cases may be a child or grandchild who was not expecting a tax bill. There are ways to mitigate this, for example through insurance or provisions in your will.
Where gifting has already taken place, one of the biggest challenges for families after a grandparent’s death is poor record keeping. Executors may be required to account for gifts made in the seven years prior to death (or longer if gifts have been made into trust), and incomplete records can cause significant delays and stress. This is particularly important if relying on the normal expenditure out of income exemption, as HM Revenue & Customs will generally require evidence that sufficient income existed to fund the gifts.
Other pitfalls include misunderstanding how exemptions interact or making gifts where the grandparent continues to benefit from the asset (for example, gifting a property but continuing to live in it rent-free).
Final thoughts for grandparents
Lifetime gifting allows grandparents to see the benefit of their generosity, support loved ones when it matters most, and potentially reduce the IHT burden on their estate. However, the rules are complex, and well-intentioned gifts can have unintended tax consequences if exemptions are misunderstood or records are incomplete.
Before making significant gifts, it is sensible to review the IHT position carefully and ensure that any gifting fits within your wider financial and estate planning arrangements. Done correctly, lifetime gifting can be both tax-efficient and immensely rewarding—for you and your family.
If you would like advice on how lifetime gifting might fit into your overall estate planning, please contact us.