Tax on gifts to grandchildren

Making gifts to grandchildren can be a great way to mitigate inheritance tax (IHT) and give grandchildren a helping hand, but this can mean tax implications so it is important to understand the detail before entering a gifting arrangement.

Nil rate bands

On your death, inheritance tax will be charged on the value of the assets that you hold. You will have a nil rate band of £325,000 which can be deducted from your estate and any value over this will be charged to inheritance tax at 40%.

You may also have access to a transferred nil rate band from a previously deceased spouse of up to a further £325,000 and possibly a residence nil rate band (RNRB) or transferred RNRB if certain conditions apply. Under certain circumstances these exemptions can add up to £1,000,000. But in many cases this will be lower.

Making gifts to grandchildren will reduce the value of your estate but you must bear in mind that any gifts that are made must be survived by seven years to be effective; otherwise they will still use your nil rate band on your death.

After seven years have elapsed, your nil rate band will ‘refresh’ and it will be available in full again, so a programme of regular gifting can reduce your estate chargeable to IHT significantly.

Exemptions

There are several exemptions which do not require a seven year survival period and these are:

• Small gifts of up to £250 per person per year such as Christmas or birthday presents;
• A £3,000 annual exemption (which can be carried forward by one year);
• A £2,500 exemption on the marriage of a grandchild; and
• regular payments from excess income

If you are married then each of you will have the same exemptions – and so able to double the value of the gifts.

Regular payments out of income is a very valuable relief and so great care must be taken to ensure you stay within the rules. However, very broadly you can make gifts from your excess income each year as long as this is a regular commitment and does not reduce your standard of living.

Gifts of assets

You must take care if you gift assets rather than cash because you may also trigger a capital gain. For example, gifting a property which you have held for a long time could trigger a sizeable gain at 28% – with no proceeds generated with which to pay the tax.

Anti-avoidance

For many people their major asset is their main residence. You must take great care with any IHT planning around the family home. If you give away an asset and continue to benefit from it this is a ‘gift with reservation’ the value of which will remain in your estate. This will apply equally to other assets such as holiday homes, cars or antiques unless you pay a market rent – which of course will be taxed to income tax on the person who receives it.

What about cash? Further anti-avoidance rules apply if you give away cash and then benefit from an asset purchased with the cash. This will trigger a charge to income tax called a ‘pre-owed assets charge’.

Gifting can be a great way to reduce your estate, but should be done with care and advice to ensure that it is effective.