‘Will my grandparents have to pay tax on a £100k gift?’
Updated
“My grandparents have savings that they would like to give to my brother and I for a house deposit without us having to wait to inherit the money when they die.
They would be giving us roughly £100,000 in total, split equally between us. We each have a Lifetime ISA containing about £15,000, but our grandparents are very keen to top up our savings.
I am conscious that there could be tax implications if they were to give us this money now. Are there any tax-efficient ways for them to do this?
I have also briefly researched private mortgages and wondered if this was a potential way for them to help us. We wondered if our grandfather could buy us a house with cash and then we could pay him back over time. He wouldn’t charge us interest so it would be cheaper than a regular mortgage.
Are there any downsides of doing this?”
Troubleshooter says:
It is sensible to consider the tax implications of such a generous gift. The main tax that your grandparents need to be wary of when giving you and your brother this money is inheritance tax.
Inheritance tax can be levied at a rate of up to 40% and the rules are complicated.
The good news is that this £100,000 gift won’t immediately incur a bill and might never incur one.
However, it could be factored in when calculating the size of your grandparents’ estate, which includes their property, possessions and any savings and investments they own when they die.
When someone dies, £325,000 of their estate is free from inheritance tax. The allowance increases to £500,000 for people who pass on their homes to their children or grandchildren.
If your grandparents are married then they can inherit each other’s tax-free allowances, potentially giving them a threshold of up to £1 million. Provided their total estate is worth less than their combined allowance when they both die then no inheritance tax will be due.
When an estate exceeds the threshold there might be tax to pay on the excess, but there are ways of avoiding this.
Every tax year you can give away £3,000 and it immediately falls outside of your estate. You can give this £3,000 to one person or split it between several people.
Each of your grandparents could give you £3,000. But even if you got a £6,000 gift from them every year, it would take nearly 17 years to pass on the £100,000.
And actually it makes more sense for them to give you this gift as soon as possible to give it the best chance of being free from tax.
This is because once your grandparents give you this money it will remain as part of their estate for seven years (even though it technically belongs to you and your brother).
If they die within seven years the £100,000 will be deducted from their tax-free allowance when they die. So if they have a combined tax-free allowance of £650,000 this would shrink to £550,000.
Your £100,000 would be tax-free, it’s just that a greater portion of your grandparents’ estate could be subject to paying tax.
If they survive for seven years after giving you the £100,000 then the money will fall outside of their estate and will no longer be subject to inheritance tax.
So it makes financial sense for your grandparents to give you the money now, as well as giving them the chance to see you enjoy the money while they are alive.
There is another thing to be aware of: if each of your grandparents gives away more than £325,000 within seven years of their death then there might be tax levied on their £100,000 gift too.
The rate of tax would depend on how many years had passed since they gave you the money. If they die within three years then it will be taxed at a rate of 40%.
But gifts given in the three to seven years before they die are taxed on a sliding scale which I’ve outlined in the table below.
| Years between gift and death | Rate of tax on the gift |
|---|---|
| Three to four | 32% |
| Four to five | 24% |
| Five to six | 16% |
| Six to seven | 8% |
| Seven or more | 0% |
What if we take a home loan from our grandparents?
You also asked whether it might make sense for your grandparents to buy a property on your behalf so you can pay them back over time.
But if your grandparents do this then you wouldn’t be able to use your Lifetime ISA savings as a deposit without forfeiting the government bonus.
Every year savers can contribute up to £4,000 into a Lifetime Isa and get a 25% government top-up of £1,000. We explain how the Lifetime ISA works and the top-rated providers.
The product was launched in 2017 to help young people buy their first homes or save for their pensions and is not designed for those who have family members who can afford to buy them a property.
The penalty for withdrawing money outside of the rules is also very harsh: not only do you stand to forfeit the 25% government bonus but it erodes some of the savings you put in too.
So if your grandparents gave you a mortgage, you would have to commit to saving into your Lifetime ISA until you are 60 or face a hefty withdrawal penalty by taking the money out before then.
It might make more sense for your grandparents to give you the money as a deposit rather than lending you a home loan. This would allow you to use your Lifetime ISA and take out a mortgage from a regular commercial lender.
You said you hope to buy in the next year so I hope you make the most of your grandparents’ gift to purchase your first home.
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