Grandparents often want to help grandchildren financially — whether for education, a first home, or building savings. Here’s how to do it tax-efficiently.
For the wider cluster covering gifting rules, thresholds and planning routes, use the main Inheritance Tax hub. See also: IHT planning guide and our IHT calculator.
Tax-Free Gift Allowances for Grandparents
Annual Exemptions 2026/27
| Exemption | Amount | Notes |
|---|---|---|
| Annual exemption | £3,000/year | Per grandparent |
| Carry-forward unused | +£3,000 | From previous year only |
| Small gifts exemption | £250/person | Unlimited recipients |
| Wedding/civil partnership gift | £2,500 | To grandchild specifically |
| Gifts from income | Unlimited | Must be from surplus |
| Birthday/Christmas gifts | No set limit | Exempt only if given from your regular income |
How the Exemptions Work
Annual exemption (£3,000)
- Each grandparent has their own £3,000 allowance
- A married couple can give £6,000 combined
- Can carry forward one unused year (max £6,000 per person)
- Must use current year’s allowance first
Small gifts (£250)
- Can give £250 to unlimited different people
- Cannot be combined with another allowance for the same person
- Useful for multiple grandchildren
Wedding gifts
- Grandparents can give £2,500 per grandchild’s wedding
- Parents can give £5,000
- Anyone else can give £1,000
- Must be made on or shortly before the wedding
Potentially Exempt Transfers (PETs)
Outright gifts to an individual above the exemptions become PETs: only taxable if you die within 7 years. The same rules apply when gifting money to children, but the gift amounts and context often differ for grandparents.
The 7-Year Rule and Taper Relief
| Years Before Death | IHT Rate on Gift | Tax Payable |
|---|---|---|
| 0-3 years | 40% | Full rate |
| 3-4 years | 32% | 80% of rate |
| 4-5 years | 24% | 60% of rate |
| 5-6 years | 16% | 40% of rate |
| 6-7 years | 8% | 20% of rate |
| 7+ years | 0% | Tax-free |
How PETs Are Taxed
- Gifts use up the £325,000 nil-rate band first
- IHT (40%) only applies to gifts exceeding this
- Taper relief reduces tax if death is 3-7 years after the gift, but only once gifts in the 7 years before death add up to more than the nil-rate band
- Tax on a gift is usually paid by the estate. If gifts in the 7 years before death total more than the nil-rate band, the people who got the gifts pay it
Example:
- Grandparent gifts £400,000 to grandchild
- Dies 4 years later
- First £325,000 — tax-free (nil-rate band)
- Remaining £75,000 — 40% × 60% taper = £18,000 IHT payable
Gifts from Regular Income — The Best Exemption
The most powerful exemption has no set limit, as long as the gifts are normal expenditure paid out of surplus income. It requires record-keeping, but there is no set limit on the amount if the conditions are met, and pension income counts as income.
Requirements for Income Exemption
| Requirement | What It Means |
|---|---|
| From income not capital | Wages, pension, rent, interest or dividends, not the savings or investments themselves |
| Regular or habitual | Usually a pattern of giving, though a single gift can qualify if it starts a pattern |
| Normal expenditure | Part of regular spending pattern |
| Surplus income | After all normal living costs |
| No reduction in lifestyle | Income left over must still cover your usual standard of living |
Documenting Gifts from Income
Keep records showing:
- Your regular income (pay slips, pension statements)
- Your normal expenditure (bills, living costs)
- The surplus available for gifting
- The regular pattern of gifts made
Example annual income calculation (illustrative figures):
| Item | Amount |
|---|---|
| Pension income | £35,000 |
| State Pension (full new State Pension, 2026/27, rounded) | £12,548 |
| Investment dividends | £5,000 |
| Total income | £52,548 |
| Normal living expenses | -£28,000 |
| Surplus available | £24,548 |
If you gift £20,000 a year to grandchildren from this surplus as a regular pattern, and your usual standard of living is unaffected, the gifts can be exempt from IHT as normal expenditure out of income.
Best Ways to Gift Money to Grandchildren
Not all gifting routes are equally efficient. The right choice depends on the grandchild’s age, whether you want the money accessible, and how much you want to give. The options below each have different tax, access, and control implications.
Tax-Efficient Savings Vehicles
| Option | Annual Limit | Benefits | Considerations |
|---|---|---|---|
| Junior ISA | £9,000 | Tax-free growth, inaccessible until 18 | Child can take control at 16 but cannot withdraw until 18 |
| Junior SIPP | £3,600 gross | Tax relief adds 25%, locked until minimum pension age (55, rising to 57 from 6 April 2028) | Very long-term |
| Premium Bonds | £50,000 total holding | Capital-safe, tax-free prizes | No guaranteed return |
| NS&I Junior ISA | £9,000 | Government-backed, variable rate | Lower returns |
| Bare trust | Unlimited | Trustees manage it until the child is old enough, simple setup | Income taxed as child’s |
Junior ISA Strategy
| Action | Impact |
|---|---|
| Both grandparents contribute £3,000 | £6,000/year into JISA |
| Parents contribute rest | Up to £9,000 total |
| Held for 18 years | No tax on interest, growth or dividends while in the account |
| Child accesses at 18 | For university, house deposit |
Contributing to Grandchild’s Pension
If grandchild has earnings:
- Contribute up to 100% of their earnings
- They get tax relief (adds 25% to basic rate)
- Compound growth is substantial
Example:
- Grandchild earns £10,000/year
- Grandparent contributes £8,000 (within earnings)
- Tax relief adds £2,000 (basic rate)
- Total in pension: £10,000
Trusts for Grandchildren
Types of Trusts Available
| Trust Type | How It Works | Tax Treatment |
|---|---|---|
| Bare trust | Child owns assets, trustee manages | Income/gains taxed as child’s |
| Discretionary trust | Trustees decide distributions | 45% income tax (39.35% on dividends), 24% CGT |
| Interest in possession | Child entitled to income | Trustees pay income tax at 20% (10.75% on dividends) |
| 18-25 trust | Only for a child who has lost a parent; assets held until 18-25 | IHT exit charges may apply between 18 and 25 |
Bare Trust Benefits
Features of a bare trust:
- Simple structure: the trustees look after the assets until the child is old enough
- The child reports the income on their own tax return
- Child uses their own tax allowances
- Assets are held in the name of a trustee for the child
- Child gains full control at 18 (16 in Scotland)
Tax efficiency:
- Child’s £12,570 personal allowance
- £5,000 starting rate for savings (0%, if the child has little other income)
- £1,000 personal savings allowance (basic rate)
- £3,000 capital gains tax-free allowance
When Discretionary Trusts Make Sense
Consider if:
- Want control over when/how money is distributed
- Concerned about child’s financial maturity
- Want to set money aside for a grandchild who may need more help later
- Multiple grandchildren with different needs
- Large amounts involved (IHT planning)
School Fees and Education
Paying private school fees for grandchildren can involve large gifts. The challenge is that fees are often paid year after year, which suits the income exemption well, but lump-sum approaches require careful IHT planning.
Paying School Fees Directly
| Method | Tax Efficiency | Notes |
|---|---|---|
| One-off lump sum | PET: no tax if you survive 7 years | If you die within 7 years, a large gift uses the nil-rate band first |
| Annual payments | Income exemption possible | If from surplus income |
Calculation Example
Private school fees at £18,000/year for 7 years = £126,000
Strategy:
- Two grandparents gift £6,000/year (annual exemption): £42,000
- Remaining £84,000 from surplus income (£6,000/year each, £12,000/year combined): Tax-free if the payments meet the normal expenditure out of income conditions
- Total: £126,000 exempt from IHT, provided the income gifts qualify as normal expenditure out of income
Help with House Purchase
Gifting a House Deposit
| Gift Amount | Coverage | Notes |
|---|---|---|
| Up to £6,000 | Annual exemptions (couple) | Immediately exempt |
| Up to £12,000 | Two years’ exemptions (couple) | If carry-forward available |
| Above £12,000 | Beyond two years’ exemptions for a couple | The excess becomes a PET |
Important: Many lenders ask for a gifted deposit letter confirming it’s a gift, not a loan. For larger property gifts see our guide on gifting property to children.
Avoiding ‘Gift with Reservation of Benefit’
If you give away a property, or money towards one, and then live in it rent-free, HMRC can treat it as still in your estate or charge income tax on the benefit. To avoid:
- Pay full market rent if occupying
- Don’t keep using a gifted property for free (paying full rent is the exception)
- Keep clear documentation
Record-Keeping Requirements
You should keep records of the gifts you make, especially income exemption gifts and larger PETs. Gifts made in the 7 years before death can be taxed, and the executor needs details of them for the IHT403 gifts schedule that goes with the IHT400 return.
What Records to Keep
| Document | Purpose | Keep For |
|---|---|---|
| Gift amounts and dates | Prove exemptions used | At least 7 years after each gift |
| Recipient details | Support IHT returns | At least 7 years after each gift |
| Income statements | Prove income gifts | At least 7 years after each gift |
| Bank statements | Show payment trail | At least 7 years after each gift |
| Trust documentation | Legal evidence | While the trust exists |
| Expenditure records | Prove surplus income | At least 7 years after each gift |
Annual Record Template
Create a simple spreadsheet:
- Date of gift
- Amount
- Recipient name
- Exemption used (annual/small/income)
- Running total of annual exemption used
Common Mistakes to Avoid
The mistakes below are easy to make, especially failing to document income exemption gifts and making gifts with reservation. Even financially sophisticated families often overlook these.
| Mistake | Consequence | Solution |
|---|---|---|
| Not keeping records | Can’t prove exemptions | Document everything |
| Forgetting carry-forward | Lose unused allowance | Use both years’ exemptions |
| Gift with reservation | Gift remains in estate | Don’t benefit from gifts |
| Giving away too much | Financial difficulty | Keep adequate reserves |
| Ignoring income tax | Child may have tax bill | Stay within allowances |
| No professional advice | Suboptimal planning | Consult IFA for larger gifts |
Pension planning from April 2027: Most unused pension funds and death benefits are being brought into IHT from April 2027. If you are considering passing pension wealth to grandchildren rather than gifting outright, this changes the calculation. See our pensions and IHT guide.
Planning for Multiple Grandchildren
Grandparents with several grandchildren face both opportunity and complexity. Annual exemptions apply per grandparent (not per grandchild), so the amount per child is limited. Surplus income gifts are more flexible: there is no limit on the amount, as long as the payments are regular and affordable after usual living costs.
Treating Grandchildren Equally
| Strategy | How It Works |
|---|---|
| Equal amounts now | Same gift to each |
| Age-adjusted | Older children received less historically |
| Needs-based | More to those needing help |
| Equal total | Adjust for timing differences |
Example: Four Grandchildren
Grandparents (couple) want to gift £12,000/year total:
- £3,000 to each of the four grandchildren
- The couple’s combined £6,000 annual exemption (£3,000 each) covers half of this — £6,000 of the £12,000
- The remaining £6,000 is either a potentially exempt transfer or needs to come from the normal-expenditure-from-income exemption to be immediately tax-free
- Birthday and Christmas gifts paid from regular income are exempt too (the £250 small gift allowance cannot be used for a grandchild already receiving gifts under another allowance)
- Can increase if surplus income available
When to Get Professional Advice
Seek advice from a financial adviser or solicitor if (see also our guide to how to avoid IHT legally):
- Total gifts likely to exceed £325,000
- Complex family arrangements
- Property transfers involved
- Setting up trusts
- Large regular gifts from income
- Business Asset Relief might apply
- You’re unsure about any aspect
Related Guides
Gifting and Inheritance Tax
- Gifting Money to Children Tax-Free — 7-Year Rule
- Gift Tax Rules UK — How Much Can You Give Tax-Free?
- Gifts from Income Exemption Explained UK 2026
- Taper Relief on Gifts — Inheritance Tax
- Gifting Property to Children UK — Tax Rules
- Gifting Shares to Children — IHT
IHT Planning
- Inheritance Tax Guide UK — Thresholds and Rates
- Inheritance Tax Threshold 2026/27 — Nil-Rate Band
- How to Avoid Inheritance Tax Legally UK
- IHT Planning Guide UK 2026
- Inheritance Tax Calculator UK 2026/27
- Discretionary Trust — IHT Explained
- Pensions and Inheritance Tax After April 2027
Savings Vehicles for Grandchildren
- Junior ISA Guide UK — Save Tax-Free for Your Child
- Best Junior ISA UK 2026
- Junior SIPP Guide UK — Build a Pension for Your Child
- Premium Bonds Guide 2026