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Last Updated: Tuesday, 4 October 2005, 16:18 GMT 17:18 UK
Giving money to grandchildren
Passing money directly to grandchildren is one of the most efficient ways of avoiding inheritance tax, particularly for the better off.

Not only can it reduce your own estate's liability to the tax but it also, in effect, skips an inheritance tax generation.

Any money you leave to your children will, inevitably, form part of their estate when they die.

But if you give money straight to the grandchildren it keeps the cash out of your children's own inheritance tax calculation.

How to do it

There are a number of ways of giving money to your grandchildren tax-free. Each child can receive 250 a year by way of gift which is tax exempt.

Alternatively you can utilise your 3,000 a year tax exempt gift allowance to give them money, but this is instead of, not as well as the 250 a year.

The 3,000 tax exempt gift allowance is available to each grandparent each year and if not used can be carried forward for one year only.

If your grandchildren marry, each grandparent can give a 2,500 wedding gift without incurring tax.

This is in addition to the 3,000 annual gift exemption. You are also entitled to make gifts out of your income.

These would have to be regular gifts, such as birthdays and Christmas, and it must be clear that you did not have to dig into capital to make the gift.

Gifts

Gifts are a relatively simple way of passing money to your grandchildren and keeping it out of the inheritance tax net.

However, care must be taken to ensure that your capital is not so eroded as to make life difficult for you and indeed for your children.

There is also a worry that as your grandchildren get older they simply squander the money in a way that you would not have wished.

One way to overcome this fear is to protect the money through a trust.

These can be complex so require solid supporting advice but can be a sensible way to pass money to minor children or grandchildren.

It is also important to seek advice from the Revenue if you have any doubts about the tax treatment of an investment.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.


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