IHT on Gifts to Grandchildren: Exemptions, PETs, Bare Trusts, and Generation-Skipping Estate Planning
Grandparents can give up to £3,000 per year each tax-free (£6,000 for a couple), plus £2,500 as a wedding gift per grandchild, plus unlimited gifts from surplus income. Larger gifts are PETs — outside the estate after 7 years. The family home can pass directly to grandchildren and still claim the Residence Nil Rate Band.
Giving to Grandchildren and Inheritance Tax
IHT exemptions available when giving to grandchildren
Several annual IHT exemptions apply when a grandparent makes gifts to grandchildren: (1) Annual exemption (s19 IHTA 1984): each grandparent can give £3,000 per tax year to anyone — including grandchildren — free from IHT. Unused annual exemption from the previous year can be carried forward (once only). Two grandparents (or four across two sets) can each use their own £3,000 annual exemption — giving up to £12,000 per year to grandchildren across all four grandparents without using the 7-year PET clock. (2) Small gifts exemption (s20 IHTA 1984): each grandparent can give up to £250 to each grandchild per tax year, free from IHT. If there are four grandchildren, each grandparent can give £1,000 per year in small gifts (£250 × 4). The small gifts exemption cannot be used to top up a gift already covered by another exemption — it applies to gifts fully covered by the £250 limit. (3) Normal expenditure from income (s21 IHTA 1984): regular gifts out of surplus income — where the grandparent has income left over after meeting their normal standard of living — are immediately exempt from IHT with no cap and no 7-year clock. A grandparent who receives a pension and ISA income above their living costs can give £500 or £1,000 per month to grandchildren entirely free of IHT, provided the gifts are regular, come from income (not capital), and leave the grandparent able to maintain their normal standard of living.
Marriage gift exemption for grandchildren: £2,500 per grandparent
Under s22 IHTA 1984, gifts made in consideration of a marriage or civil partnership of the recipient are exempt from IHT up to: £5,000 from a parent; £2,500 from a grandparent or remoter ancestor; £1,000 from any other person. The £2,500 marriage exemption applies per grandparent — both the maternal and paternal grandparents (i.e. up to four grandparents) can each give £2,500. Total potential marriage exemption from four grandparents: £10,000. The gift must be made in consideration of the marriage — generally made before the wedding (on or before the date of the marriage) and contingent on the marriage taking place. The marriage exemption stacks with the £3,000 annual exemption — a grandparent can give £2,500 (marriage exemption) plus £3,000 (annual exemption) = £5,500 per grandparent, per marriage.
Larger gifts to grandchildren: PETs and the 7-year rule
A cash gift from a grandparent to a grandchild that exceeds the available exemptions (annual exemption, marriage exemption, small gifts, normal expenditure from income) is a potentially exempt transfer (PET). PETs: (1) Are immediately outside the estate if the grandparent survives 7 years from the date of the gift; (2) Are subject to IHT (with taper relief) if the grandparent dies within 7 years; (3) Use the grandparent's available NRB on death (PETs reduce the NRB available for the death estate). A grandparent giving £100,000 to a grandchild for a housing deposit makes a PET. If they survive 7 years, the gift is free from IHT. If they die in year 5, taper relief reduces the IHT by 40% (PET in years 5–7 = 40% taper). There is no IHT on the PET in the grandchild's hands — the IHT falls on the grandparent's estate on the chargeable transfer schedule, not on the grandchild directly.
Bare trusts for grandchildren
A grandparent who wants to give money to a grandchild who is too young to receive it directly can use a bare trust (also called an absolute trust). Under a bare trust: (1) The gift is made to the trust immediately — it is a PET at the time of the gift (not a CLT), so no immediate IHT; (2) The grandchild is the absolute beneficial owner from the moment the bare trust is created; (3) There are no ongoing trust charges (no 10-year periodic charge, no exit charge) — unlike a discretionary trust; (4) The grandchild is entitled to receive the trust fund at age 18 (or 16 in Scotland); (5) Income and gains in the trust are taxed as the grandchild's (usually at their lower marginal rate). A bare trust for a grandchild is the simplest and most tax-efficient gift mechanism for grandparents who want to give a significant sum but the grandchild is under 18. The main risk: the grandchild receives the full fund at 18 with no restrictions — if the grandparent wants to restrict access until 21 or 25, a discretionary trust or 18-25 trust (s71D IHTA 1984) is needed instead.
RNRB and passing the family home to grandchildren
The Residence Nil Rate Band (RNRB — up to £175,000, and up to £350,000 with the Transferable RNRB) is available where a qualifying residential property is included in the estate and passes to a 'direct descendant'. Under s8K IHTA 1984, a direct descendant includes children, grandchildren, great-grandchildren (and their spouses and civil partners). A grandparent can leave their home directly to grandchildren in their will and claim the RNRB — it applies to grandchildren in exactly the same way as to children. This is very relevant for generation-skipping planning: a grandparent who leaves the home to grandchildren (bypassing an adult child who does not need the inheritance) can still claim the RNRB. The grandchildren's parent need not be involved for the RNRB to apply to a direct gift from grandparent to grandchild.
Frequently Asked Questions
How much can a grandparent give a grandchild without inheritance tax?
Each grandparent can give: £3,000 per year (annual exemption); £250 per grandchild per year (small gifts exemption — cannot be used to top up larger gifts); £2,500 to a grandchild as a marriage/civil partnership gift (once per marriage). Regular gifts from surplus income have no cap (normal expenditure from income exemption — s21 IHTA 1984). Across four grandparents, the annual exemption alone can pass £12,000 per year to the grandchildren collectively, or £48,000 per year if each grandparent gives £3,000 to each of four grandchildren. Larger gifts are PETs — outside the estate after 7 years.
Do gifts to grandchildren count as PETs?
Yes. Any gift from a grandparent to a grandchild that exceeds the available IHT exemptions (annual exemption, small gifts, marriage exemption, normal expenditure from income) is a potentially exempt transfer (PET). The PET is outside the estate if the grandparent survives 7 years. If the grandparent dies within 7 years, IHT is charged on the PET value (with taper relief in years 3–7). The PET uses the grandparent's NRB on death. There is no IHT charge on the grandchild personally.
Can I set up a trust for my grandchildren to avoid IHT?
Yes — a bare trust (absolute trust) for a grandchild is the simplest structure: the gift to the bare trust is a PET (not a CLT), no ongoing trust charges, grandchild receives the fund at 18. A discretionary trust gives more control (grandchild can receive funds at whatever age the trustees decide) but is a CLT on entry, with 10-year periodic charges. An 18-25 trust (s71D IHTA 1984) is an intermediate option: no periodic charges while the grandchild is under 25, but an exit charge on distribution after 18. The right structure depends on the grandchild's age, the amount being given, and how much control the grandparent wants to retain.
Does the Residence Nil Rate Band apply if I leave my home to my grandchildren?
Yes — grandchildren are 'direct descendants' for RNRB purposes (s8K IHTA 1984). You can leave your home directly to grandchildren in your will and claim the RNRB (up to £175,000) on the property value, exactly as if you were leaving it to children. If your spouse or civil partner predeceased you, the Transferable RNRB (up to £175,000 more) may also be available, giving a combined RNRB of £350,000 on your estate.
What is the best way to gift money to young grandchildren for IHT?
For young grandchildren (under 18): (1) Regular monthly gifts from surplus income (s21 normal expenditure from income) — immediately IHT-free, no limit; (2) Bare trust — give a lump sum that is a PET outside the estate after 7 years; grandchild receives at 18; (3) Annual exemption — £3,000 per year per grandparent; (4) Junior ISA — no IHT exemption, but shelters investment growth for the grandchild; (5) If the grandchild's parents will predecease you, consider leaving the inheritance via the grandchildren's share of your estate directly. The best combination depends on the total amount, how long you are likely to live, and how quickly you want to start the 7-year PET clock.
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