Gifting money to a child or grandchild

Tax rules when gifting money to a child

There are a few things about tax you should consider before gifting money to a child.

Inheritance tax and gifting

When money or assets are paid into an account (including Junior ISAs, Junior SIPPs) for a child’s benefit, they are treated as a gift. Some gifts are free or exempt from tax, others may be subject to inheritance tax (IHT). Here are some of the exemptions:

• Annual exemption

  You can normally give away up to £3,000 per tax year inheritance tax free. This is known as the annual exemption. You can carry any unused annual exemption over to the next tax year but if you don't use it in that year, it’s lost.

  For example: if you used £2,000 of your annual exempt amount in the last tax year you could then gift £3,000 for the current tax year, and £1,000 carried over, a total of £4,000.

• Small gifts

  On top of the annual exemption is a small gifts exemption. This allows you to give up to £250 each to any number of recipients each tax year, although not to anyone who received a gift that came under any of the other exemptions.

  Please note that you can't give more than £250 and claim the first £250 as a small gift. If you give an amount greater than £250 the exemption won’t apply.

• Gifts out of income

  You can also make 'gifts out of income' free from inheritance tax. Regular payments made out of excess income (which don't affect your standard of living) are normally exempt from IHT.

  This can be a useful exemption for those wanting to contribute to a child’s investments through regular savings.

  It’s important to keep records. If you decide to make regular gifts out of income as part of your normal spending, you should keep a record of your after-tax income. This will demonstrate the gifts you've made are regular and you have enough income to cover them and your usual day-to-day costs, without having to draw on your capital.