From school fees and university costs to helping with a first home deposit, gifting to grandchildren tax-free can make a real difference to their lives. What many don’t realise is that giving “little and often” can also help reduce any potential Inheritance Tax (IHT) liability.

So, how much can you gift your grandchildren tax-free, and what rules should you be aware of?

Annual Gifting Allowance

Each grandparent can gift up to £3,000 per tax year free from IHT. This amount can either be given to one grandchild or split between several. If you do not use your full £3,000 allowance, you can carry it forward for one year only. This means you could potentially gift £6,000 in a single year, although any unused allowance cannot be carried into a third year.

In addition to this allowance, you can make unlimited gifts of £250 to different people each year, provided that no one individual receives both this small gift and part of your annual exemption. You can also gift up to £2,500 for a grandchild’s wedding (or £5,000 for your own child).

Other Tax-Efficient Options

Junior ISA – Grandparents can contribute to a Junior ISA once a parent has opened the account. The annual limit is £9,000 (2025/26 tax year), and funds are tax-free until your grandchild accesses them at age 18.

Pension Contributions – You can contribute £2,880 a year into a child’s pension, boosted to £3,600 with 20% tax relief. While the money is locked away until your grandchild’s late fifties, it provides a strong foundation for their long-term financial future.

Fees and Payments – You can use surplus income to make regular payments for school fees, hobbies, or living costs without IHT implications. Payments in your name are treated as personal costs, not taxable gifts, making it an easy way to support your grandchildren.

Trusts – For larger sums or to retain some control, you may wish to set up a trust, specifying how and when your grandchildren can access the money. Different trust structures carry different tax considerations, so professional advice is recommended.

Premium Bonds – You can buy Premium Bonds in your grandchild’s name, giving them the chance to win monthly tax-free prizes of up to £1 million. While they don’t earn interest like a savings account, they can be a fun way to save with the added excitement of potential wins.

The Seven-Year Rule and Inheritance Tax (IHT)

Gifts above the annual allowances may still be free from IHT if you survive for seven years after making them, which is known as a Potentially Exempt Transfer. If the gift is made within three years of death, it is taxed at 40%, but after three years, taper relief applies, gradually reducing the rate until it falls to 0% after seven years. More information can be found on taper relief here.

Key Takeaways

Grandparents can each gift £3,000 every year tax-free (or £6,000 if carrying forward one unused year).
Extra allowances apply for small gifts, weddings, and gifts out of income.
Options such as Junior ISAs, pensions, and trusts can be used for longer-term financial support.
Large gifts may be subject to the seven-year rule for IHT purposes.

Passing on financial help to your grandchildren is one of the joys of being a grandparent, and with the right planning it can be a wonderful way to see them thrive. A well-considered gifting strategy not only supports them at key stages in life but also ensures your generosity makes a difference without creating unexpected tax implications, while helping to reduce the value of your estate for IHT purposes.

If you’re considering gifting money and would like tailored advice, it’s always best to seek guidance from a professional adviser.

To discuss your options, contact Nick Lawson at HGHWM here.