Helping Grandchildren Financially: A Strategy Is Key

A strategic guide for homeowners over 50 on gifting without unintended tax or legacy consequences

Supporting grandchildren can be one of the most rewarding expressions of financial success. Whether it’s helping them onto the property ladder, funding education, or seeding future investments, many high-net-worth individuals reach a stage where gifting feels not just desirable, but purposeful.

Yet the instinct to give, particularly later in life, must be balanced with structure. UK inheritance tax rules are nuanced, and without careful planning, well-meant gifts can introduce unnecessary complications for both the estate and the recipients. Equally, gifting too freely, without preserving personal security, can unintentionally compromise future liquidity or lifestyle choices.

This article offers clarity for homeowners aged 50 and over who wish to support grandchildren, with a focus on what’s allowed, what’s efficient, and what’s wise. Our objective is to equip you with the insight needed to act with generosity, without risk or regret.

The Gifting Rules: Understanding the Framework

Gifting is not simply a personal act, it carries legal and tax implications. For UK-domiciled individuals, inheritance tax (IHT) is charged at 40% on the value of an estate above the nil-rate threshold (and residence nil-rate band, if eligible). While gifts can reduce the eventual IHT liability, they are not always exempt.

Key gifting allowances:

• Annual exemption: Each individual may gift up to £3,000 per year, free of IHT. This can be carried over for one year if unused, allowing a maximum of £6,000.
  
• Small gift exemption: You may give up to £250 to any number of individuals each tax year, provided they haven’t also received part of your £3,000 exemption.
  
• Gifts on marriage or civil partnership: Up to £2,500 for a grandchild (and £5,000 for a child) are exempt if made in connection with their marriage.
  
• Gifts from surplus income: Perhaps the most underused allowance. If you can demonstrate that a gift is made regularly, from surplus income, and does not reduce your standard of living, it may fall outside the estate entirely for IHT purposes.
  
• Potentially Exempt Transfers (PETs): Gifts above the thresholds may fall outside the estate after seven years, provided no benefit is retained. However, if you die within this window, taper relief may apply.

Note: Henry Dannell does not provide tax advice. Clients should consult a qualified tax adviser to confirm how these rules apply to their circumstances.

Helping Without Overexposing

One of the most frequent concerns we hear from clients is: “I want to help my grandchildren now, but what if I need the money later?”

This is where structured planning becomes essential. You are not choosing between generosity and security; you are designing a balance between them.

Strategies to consider:

• Loan notes with soft repayment terms: Advance capital to a grandchild in a formalised way, retaining a legal claim but without a practical repayment obligation unless needed.
  
• Discretionary trusts: Maintain control over gifted capital while allowing funds to benefit multiple grandchildren over time, with flexibility to adapt to their changing needs.
  
• Gifting from investment income: If you hold dividend-generating assets or receive surplus rental income, routing this via structured gifts can reduce IHT without eroding core capital.
  
• Equity release or later-life lending: For clients with significant property wealth but limited liquid assets, this can be a way to access capital for gifting without selling property prematurely. Structured correctly, it need not compromise lifestyle or inheritance.
  

When Property Is the Goal, Helping Grandchildren Buy

Gifting to assist with a first home purchase is increasingly common, particularly in London and the South East. However, lenders apply strict scrutiny when deposits are gifted.

To support a property purchase wisely:

• Ensure the gift is documented as unconditional and not a loan (unless structured as such).
  
• Declare the source transparently to avoid delays in the mortgage process.
  
• Avoid gifting from jointly held funds without both parties’ agreement, especially where the property will benefit only one grandchild.
  
• Check if a local authority would consider the gift to be a deprivation of assets.

If the deposit forms part of your IHT strategy, this may qualify as a PET, making early planning crucial.

At Henry Dannell, we often work with three generations during this process: the grandparent providing capital, the parent navigating IHT implications, and the grandchild engaging with lenders. Our role is to ensure financial harmony across generations, not just a transaction.

Using Protection to Preserve the Intent of Gifting

It may seem counterintuitive, but gifting should often be accompanied by protection. This ensures that the act of generosity does not undermine your estate’s overall stability.

Options may include:

• Life assurance written in trust, specifically designed to cover the projected IHT bill resulting from past or future gifts.
  
• Critical illness or income protection, particularly for clients who remain professionally active and are using earned income to support gifting.
  
• Family income benefit policies, offering cost-effective cover that supports beneficiaries in stages rather than in lump sums, ideal where grandchildren are still dependent or in education.

Grandchildren’s Needs Evolve, So Should Your Strategy

Today’s gift may be a house deposit. Tomorrow’s may be school fees for their own children, or seed funding for a business. Structuring gifts through trusts or flexible vehicles enables your generosity to evolve with them, even long after you’re gone.

A few considerations:

• Layered beneficiary structures allow trustees to allocate capital based on maturity, need, or circumstance.
  
• Family Investment Companies (FICs) may suit clients with substantial estates looking to control assets centrally while transferring value over time.
  
• Letter of Wishes can accompany trusts or Wills to guide the use of gifted funds without imposing strict limitations.

Closing Thoughts

Helping grandchildren financially is an act of vision, not simply generosity. The smartest approaches are those that honour your intent, safeguard your estate, and empower the next generation with clarity, not complexity.

At Henry Dannell, we work closely with clients looking to give meaningfully, not just generously. If you are considering how best to support grandchildren, today, or through your estate, our advisers would be pleased to help you explore options aligned to your personal ambitions, risk profile, and legacy plan.

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Please note: tax treatment is based on individual circumstances and may be subject to change in the future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Please also note: the Financial Conduct Authority does not regulate will writing, inheritance tax planning, and trust planning.