Gifting money to Children and Grandchildren: The Rules

Whether it is a house deposit, school fees, or a regular contribution to a grandchild’s savings pot, financial gifts between generations are one of the most meaningful ways to pass on wealth, and one of the most tax-efficient, if done right.

The key is knowing which rules apply to your specific situation. For example, gifting money to children for a house deposit works differently in some respects to gifting money to adult children more generally. Plus, the tax treatment of gifts to under-18s has a specific rule that catches many people out, while the choice between a Junior ISA and a child’s pension involves genuine trade-offs.

How much each relationship can give tax-free

These exemptions can often be combined within the same tax year. The annual exemption and a wedding gift can sit alongside each other, for example, though the annual exemption and the small gift exemption cannot both apply to the same recipient in the same year.

For the full mechanics of each exemption, the 7-year rule, and taper relief, see our companion articles on gift-free allowances and the inheritance tax 7-year rule.

The rules for gifts to children under 18

Parents can gift money to their children under 18 with no restriction on the amount itself. However, any interest earned on money gifted by a parent to a child under 18 that exceeds £100 a year is treated as the parent’s own income for tax purposes, not the child’s. This is designed to stop parents using a child’s tax allowances to shelter their own investment income. At typical, current savings rates, £100 of interest corresponds to roughly £2,000 to £3,000 of capital in an easy-access account, so for larger gifts, parents need to plan carefully.

The £100 rule does not apply to:

• Gifts from grandparents, other relatives, or friends. Interest on these is treated as the child’s own income, sheltered by the child’s personal allowance (£12,570 for 2026/27) and their own personal savings allowance.
• Interest earned within a Junior ISA or Child Trust Fund, which is completely exempt from income tax regardless of who provided the money, including parents.
• Any gift once the child turns 18.

A grandparent gifting £10,000 to a grandchild’s savings account triggers no parental income tax consequence at all. A parent doing the same in a standard savings account would see any interest above £100 a year added to their own taxable income. The practical solution for parents wanting to gift larger sums is the Junior ISA, where interest is completely sheltered regardless of source.

Are gifts to children tax-free for the recipient?

Cash gifts are not income, and a child, or an adult child, receiving a cash gift pays no income tax on it, regardless of the amount. There is no gift tax in the UK charged in the hands of the recipient. The tax implications of gifting sit with the donor, not the recipient. For instance, inheritance tax if the donor dies within seven years, and potentially capital gains tax if non-cash assets are gifted at a gain.

Have you thought through who actually carries the tax risk on gifts you are considering?

For large gifts above the annual exemption, the recipient can become personally liable for inheritance tax if the donor’s cumulative gifts in the seven-year period before death exceed the nil-rate band.

Junior ISA

A Junior ISA is a tax-free savings and investment account for children under 18. They can be either a cash ISA or a stocks and shares ISA. The annual subscription limit is £9,000 per child for 2026/27. Anyone can contribute once the account is open, including parents, grandparents, other family, or friends, though only a parent or someone with parental responsibility can open one. Grandparents cannot open a Junior ISA directly, but can contribute to one already set up.

Crucially, all interest, dividends and investment growth inside the account are completely tax-free, including money gifted by a parent. That means the £100 parental interest rule simply does not apply inside a Junior ISA. When the child turns 18, they get full control of the funds within the account and can thus withdraw or reinvest as they choose. It suits education costs, a first home deposit, or a general financial foundation.

Worked example: two grandparents each gift £3,000 a year, their annual exemption, into a grandchild’s Junior ISA from birth to age 16. Total contributions therefore come to £96,000. At an assumed 5% annual growth rate, the Junior ISA could reach roughly £140,000 to £165,000 by age 18. The interest earned in that time is entirely tax-free. However, the actual interest figure earned will depend heavily on investment performance in a stocks and shares iSA or the interest rate on a cash ISA.

Child pension

Anyone can contribute to a child’s pension, whether they’re related to the child or not. The annual limit is £2,880 net per child, regardless of how many people contribute. A big benefit to a child pension is that HMRC adds 20% basic rate tax relief to any contributions. If the full £2,880 is contributed, the effective amount saved is £3,600 a year. Furthermore, the child benefits from decades of tax-free compounding before the pension can be touched. However, with the current access age is 55, rising to 57 from April 2028, a child receiving contributions today would not see the money until their late fifties at the earliest.

For some, though, the long-term investment horizon is suitable, particularly for grandparents with surplus income who want to plant a long-term financial seed and are not concerned about the access restriction. The tax relief effectively means HMRC contributes 25% of the gross value for free.

Regular giving from income

Gifts paid regularly from surplus monthly income are exempt from inheritance tax with no upper limit, provided they do not affect the donor’s standard of living and form part of a genuine pattern. A grandparent with a pension income of, say, £60,000 a year who spends £40,000 could in principle gift the remaining £20,000 annually, removing it from their estate with no seven-year clock at all.

Real-life applications of this rule could be setting up a monthly standing order into a grandchild’s Junior ISA, paying school or nursery fees directly to the provider, covering regular activities or hobby costs, or even contributing monthly to a child pension.

The key, as ever, is documentation. For HMRC to accept this under their regular gifting legislation, the gift must be evidenced and genuinely from income. It’s a good idea to keep a simple record showing the pattern and confirming that the income exceeded expenditure each year. A straightforward spreadsheet will often prove essential for executors to claim the exemption later.

Larger one-off gifts and the PET route

For one-off gifts above the annual exemption, such as a £50,000 contribution to a house deposit, the gift becomes a Potentially Exempt Transfer. It becomes fully exempt from inheritance tax if the donor survives seven years. Taper relief applies if they die between years three and seven.

If you want more points on how to calculate IHT and taper relief, with a full worked example, see our article on the inheritance tax 7-year rule.

Gifting non-cash assets

Gifting cash carries no capital gains tax. Gifting assets such as shares, investment property, or art to a child or grandchild, other than a spouse, is treated by HMRC as a disposal at market value, and the donor pays capital gains tax on any gain above the annual exempt amount, at 18% or 24% depending on their income. Transfers between spouses remain at no gain and no loss.

For full detail on capital gains tax and gifted assets, see our companion article on how much you can gift tax-free in the UK.

What records parents and grandparents both need to keep

Keep a simple record of every gift: the date, the amount, the recipient, and whether it came from income or capital. This matters as much for parents gifting money to children as it does for grandparents, since executors will need the same evidence regardless of who made the gift.

For regular gifts claimed as normal expenditure out of income, a contemporaneous note or standing order record confirming the amounts and income source is essential for executors later on. HMRC’s form IHT403 is used by executors to declare gifts, and the easier you make it for them, the more likely the exemptions are claimed correctly. Store records with your other estate planning documents, and update them whenever you make a new or changed gift.

In summary

Parents and grandparents have broadly the same annual gifting allowances, but real differences exist. Grandparents are not affected by the £100 parental interest rule, cannot open a Junior ISA directly, and often have surplus pension income that makes the normal expenditure out of income route unusually powerful. For larger gifts, a Junior ISA shelters up to £9,000 per child a year tax-free, while a child pension locks in up to £3,600 (with tax relief) until retirement. Which option suits you depends on what the money is for and how soon the child will need it.

This article covers the general position for the 2026/27 tax year and is for general information only, not personal financial or tax advice, since everyone’s circumstances differ. If you are thinking about gifting money to children, whether for a deposit, education, or a longer-term pot, get in touch with our team and we will be glad to help you build a plan that fits your wider finances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

The Financial Conduct Authority does not regulate estate planning or tax planning.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.