Gifting Money to Children or Grandchildren: Legal and Tax Tips

Helping your children or grandchildren financially is a generous and thoughtful gesture, whether you’re assisting with a house deposit, university costs, or simply passing on some of your wealth during your lifetime. In Scotland, there are no legal limits on how much you can gift, but there are important tax rules and legal considerations to be aware of. This article provides clear guidance on how to gift money sensibly, safely, and in a way that supports your wider estate planning.

Is There a Limit on How Much You Can Gift?

In Scotland, there’s no set legal limit on how much money you can give to a child or grandchild. However, if you die within seven years of making a large gift, there could be inheritance tax (IHT) implications for your estate. This is why it’s a good idea to keep a clear record of any gifts you make, including who received the money and when. While giving small sums is usually straightforward, larger gifts may have a knock-on effect on your estate and your family’s tax position.

The Seven-Year Rule and Inheritance Tax

Under the current IHT rules, everyone has a £325,000 tax-free allowance known as the ‘nil rate band’. If the total value of your estate (including certain gifts made in the seven years before your death) exceeds this threshold, the excess may be taxed at 40%. Gifts made more than seven years before death are usually exempt from tax, while those made within that period may reduce the tax-free allowance available to your estate. Taper relief can apply if you survive more than three years after the gift, potentially lowering the tax due. It’s important to understand how timing affects the tax treatment of your gifts.

Making Use of the Annual Exemption

 Each person in the UK can give away up to £3,000 per tax year without it counting towards their estate for inheritance tax purposes. If you didn’t use this allowance in the previous tax year, you can carry it forward, allowing you to gift up to £6,000 in one year without any IHT consequences. This is a simple way to reduce the size of your estate gradually and tax-efficiently.

Gifts from Income – A Useful Exemption

 You can also make regular gifts out of your surplus income, as long as these don’t affect your normal standard of living. For example, this could include monthly payments to help with a grandchild’s rent or regular contributions towards school fees. To qualify for this exemption, the gifts must form part of a normal pattern of giving. Keeping a record of your income and outgoings is essential to prove that you had the means to make these gifts comfortably. When done correctly, these gifts are immediately exempt from IHT and do not require you to survive seven years.

Larger Gifts and the Role of Trusts

When gifting large sums of money, you may come across what are known as Potentially Exempt Transfers (PETs). These gifts become exempt from IHT if you survive for seven years, but may be taxed if you pass away sooner. If you want to retain some control over how the money is used—such as ensuring it’s spent on education or only accessed at a certain age—you could consider placing the funds in a trust. Trusts offer more flexibility and control, but they are legally more complex and may trigger their own tax consequences, so professional advice is recommended.

Could Gifting Affect Care Costs or Benefits?

Giving away money might affect your ability to qualify for help with care home fees in later life. If you gift assets and later apply for local authority funding, the council may consider whether you have deliberately deprived yourself of assets to avoid paying care costs. If they believe that was your intention, they can still treat the gifted money as part of your assets. Making gifts well in advance and as part of regular financial planning can help reduce the risk of this being questioned.

Gifting to Children Under 16

In Scotland, children under the age of 16 cannot legally hold money or property in their own name. If you’re gifting money to a young child, it will need to be held on their behalf—usually by a parent, guardian or in a designated account such as a Junior ISA. Alternatively, you can set up a bare trust, which allows the funds to be managed until the child turns 16 (or 18, depending on the structure). This ensures the money is secure and used for the child’s benefit.

Gifting for a Specific Purpose

If you’re giving money for something specific—like a house deposit or education fees—it’s worth putting your intentions in writing. This is especially important if the gift involves multiple family members or large sums of money. A written note can clarify whether the money is a gift or a loan, helping to avoid misunderstandings later on. If you intend the money to be repaid, it should be properly documented with a formal loan agreement.

The Importance of Keeping Records

Regardless of the size of the gift, keeping clear and detailed records is vital. This includes dates, amounts, the recipient’s details, and the purpose of the gift. Proper documentation helps your executors when dealing with your estate and reduces the risk of disputes among family members or scrutiny from HMRC. Good record-keeping is especially important if gifts are made regularly or are part of your inheritance planning.

When to Take Legal or Financial Advice

If you’re planning to give away substantial sums of money, or if the gift forms part of your wider estate planning, it’s wise to seek legal or financial advice. A solicitor can help you explore options like trusts, update your Will, and ensure your intentions are properly recorded. A financial adviser can make sure you aren’t putting your own financial security at risk and help you plan gifts in a tax-efficient way.

Final Thoughts

Gifting money to children or grandchildren can be a kind and practical way to support your loved ones, but it’s essential to plan carefully. From inheritance tax to care cost rules, there’s a lot to consider. By understanding the rules, documenting your intentions, and getting the right advice, you can ensure your gift benefits your family as you intended—without creating unintended complications later on.

If you’d like guidance tailored to your own circumstances, we’re here to help. Contact our experienced Private Client Team on 01324 622 888 or help@randa-fa.co.uk for expert advice on gifting and estate planning in Scotland