How much money can I give my grandchildren?

I plan to gift my two grandchildren money each year so they can build up their savings. How much am I allowed to give them every year and what considerations do I need to think about?

Caroline Russell, senior associate at law firm Wedlake Bell, says the main consideration is inheritance tax. IHT works in the same way across the UK. Estates valued at more than £325,000 are subject to it, at a flat rate of 40 per cent to the value exceeding the threshold amount. 

Essentially, a gift is not subject to IHT if the donor survives for seven years from the date of the gift (the seven-year rule). Providing the donor survives for at least three years, a tapered rate of tax applies. 

The seven-year rule does not apply if an exemption is available. The first relevant exemption is that the gift must be made from excess income and you must have sufficient remaining income to maintain your normal standard of living. You must also be able to demonstrate a regular pattern of giving. 

The second exemption is that an amount of £3,000 can be gifted each tax year with no IHT consequences. Any unused amount can be carried forward once to the following tax year. The relief can also partially exempt a gift. For example, if you gift £5,000, the first £3,000 will fall within your annual exemption and the remaining £2,000 will be subject to the seven-year rule (assuming you have not carried forward any unused relief from the previous year). 

Third, there is the small gifts exemption. A gift of £250 can be made to separate individuals per tax year (although not to anyone who has already received a gift of the whole £3,000 annual exemption). This exemption cannot be carried forward if unused. 

The final rule for gifts relates to marriage. If someone’s grandchild is getting married or starting a civil partnership you can gift them up to £2,500 (this can be combined with the £3,000 annual exemption, but not with the £250 small gifts exemption). 

It can be more effective for IHT purposes to make lifetime gifts than to pass money on through a will. However, any gifts falling within the seven-year rule reduce your IHT “nil-rate band” (the amount you can pass on tax-free on death). The nil-rate band is currently £325,000. If you gift more than £325,000 in the seven years before your death, you would eliminate your nil-rate band and anyone who received a gift above this threshold would have to pay IHT. 

The rules on taxing lifetime gifts are complex and, if you make a mistake, you could pass on a smaller legacy than intended. It’s important to keep a record of gifts you make, including the date, recipient and value. This will help your executors work out the IHT due on your death.

I’m worried about my husband’s divorce bill

My husband has instructed a prestigious (and expensive) London law firm to advise him on our divorce. I’m worried that this will run up large legal fees. Will this be taken into account when a financial settlement is finalised?

Kirsty Henderson, family solicitor at law firm RWK Goodman, says that while you are right to be concerned that your husband may run up legal fees considerably larger than your own, the good news is that due to developments in the legal system this may well be taken into account when your financial settlement is finalised. 

The other good news is that it’s safe to say that your husband won’t be able to hide his legal fees because you will both be required to give the court a statement of costs setting out all the legal fees that you have incurred to date.

Depending on where you live in the UK, divorce proceedings may differ. But when making a final order, the court first needs to see what each of your financial positions look like, so that it can work out what a fair division is. Your assets and liabilities will therefore be put into a schedule and added up. If either of you has outstanding legal fees, these will be included in the liabilities section.

Previously, the court has gone straight to distributing the total. So, let’s say that your husband spent £100,000 more than you on legal fees and this has reduced his assets from £800,000 to £700,000. Your starting point of a 50 per cent share of this would now be £350,000, instead of the £400,000 it would have been had his legal fees not come to an extra £100,000. You can see how your husband’s excessive legal fees have just been “lost in the wash” and reduced the amount you might get. It’s a bit unfair, isn’t it?

However, the courts have recently been more alive to this unfairness. In a case in October 2022, the husband’s legal fees were £159,044 and the wife’s were £463,331.

The court said that the wife’s legal fees were grossly disproportionate for the case and they didn’t need to be that high, particularly as the husband’s fees weren’t and the same job had been done. The court therefore adjusted the asset schedule and added back £200,000 to the wife’s assets before distributing the assets between them.

This shows that the courts are willing to crack down on unreasonably incurred and excessive legal fees that they think are disproportionate. So if your husband has spent considerably more than you, this may be taken into account, though it is not guaranteed. Further, if there is a marginal difference, the court is unlikely to interfere.

It’s also important to remember that there might be circumstances where one person’s legal fees are justifiably higher than the other’s. One person’s legal team, for instance, may have had a lot of additional work because one person tried to hide their assets.

If you want to increase your chances of the court taking your husband’s potentially excessive legal fees into account, make sure that you don’t give him any reason to argue that it is your conduct that has increased them.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

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