Will grandparents give financial Christmas gifts to grandchildren to avoid inheritance tax?

Older relatives looking to avoid new inheritance tax rules may look to offer financial gifts this year as Christmas presents to their grandchildren.

The recent budget saw changes in Inheritance Tax coming in April 2027 and will see making a financial gift more than just a kind act to help out a family member, as older savers look to efficiently pass on more of their wealth.

Stephanie Chung, associate in the private client team at Wake Smith Solicitors, looks at the importance of understanding personal exemptions before making gifting decisions.

This article covers:

• Impact of the Oct 2024 budget
• Tax efficient ways to gift
• Tax-free allowances
• Regular gifting from surplus income
• Gifting excess pensions cash
• Seven-year rule and potentially exempt transfers
• The use of trusts and bare trust vs Junior ISA
• Your next move

Impact of the Oct 2024 budget

From April 2027:

• Defined contribution pension pots will be included in inheritance tax calculations
• Nil rate bands will stay frozen until April 2030
• Changes to agricultural and business property relief will limit the tax-free threshold to the first £1m of combined assets 

The Office of Budget Responsibility predicts these changes will impact an additional 1.5 per cent of UK deaths, affecting 10,500 out of 213,000 estates with inheritable pension wealth in 2027-28.

A further 38,500 estates will face an average £34,000 in additional inheritance tax due to pension assets being included in estate valuations.

IHT will only apply to assets if the estate is not covered by available nil-rate bands and other reliefs.

Tax efficient ways to gift

Tax-free allowances

Individuals can give away up to £3,000 per tax year - or £6,000 for couples - without inheritance tax implications.

Gifts of up to £250 can be given to any number of people tax-free, provided no individual receives more than £250 in total.

Special allowances exist for weddings and civil partnerships, with parents able to give £5,000, grandparents £2,500, and others up to £1,000.

Regular gifting from surplus income

Regular gifts made by people with more income than they need may benefit from the normal expenditure from income exemption.

This is suitable for those wanting to make ongoing contributions to younger relatives' savings,  investments or pension pots. The gifts must be regular, come from income rather than capital, and not affect the donor's standard of living and can include income received out of a pension.

Funding a pension for a relative, has the added benefit of tax relief - with contributions up to £2,880 annually being topped up to £3,600..

Watch out when withdrawing from pension pots, as higher tax rates could offset potential inheritance tax savings.

Seven-year rule and potentially exempt transfers

Larger financial gifts can be made under the seven-year rule, leaving the estate tax-free if the donor survives for seven years.

The earlier you gift, the more chance there is of that gift becoming fully exempt.

The use of trusts and bare trust vs Junior ISA

Discretionary trusts can protect assets up to £325,000 without triggering immediate inheritance tax liability, while controlling when beneficiaries receive payments.

Bare trusts are another option, useful for grandparents investing for grandchildren.

When investing for minor beneficiaries, the inclination is to use tax-beneficial items such as a Junior ISA, but these are limited in size and can't be accessed before age 18, even for the child's benefit.

Bare trusts offer more flexibility, allowing unlimited investments and access before age 18 if needed for the child's benefit.

Your next move?

For professional advice about estate management and Wills please contact Stephanie Chung at Wake Smith Solicitors on 0114 224 2114 or email [email protected]

Find out more about our Estate Management, Wills and Probate services

Published 09/12/24