Inheritance Tax: Gifting to Children and Grandchildren

As the cost of living rises, you may be considering helping your children and grandchildren out with gifts of money to help with purchasing homes, education costs and special occasions such as weddings.

In this article, we discuss the rules around gifting money and how they interact with inheritance tax.

How Much Can I Gift Without Paying Inheritance Tax?

You can gift up to £3,000 in assets or cash per tax year tax-free to one person or several people. Each individual has their own £3,000 limit and this is called your annual allowance. If you did not make any gifts in the previous tax year, you can gift up to £6,000. You can also make as many small gifts of up to £250 per person as you like in the tax year, as long as you haven’t used up your annual allowance on the same person. Additionally, you can make single gifts for weddings and civil ceremonies of up to £5,000 for a child, £2,500 for a grandchild and £1,000 to any other person without using up your annual allowance.

Why Does The Annual Allowance Matter?

Depending on the value of your assets, your estate might have to pay inheritance tax after you die. If your estate is valued at over £325,000, your estate may be liable for tax at 40% on the value over £325,000. The value you can pass on inheritance tax-free is called the nil rate band. In addition, if your spouse or civil partner did not use any of their own nil rate band before they died, it will be transferrable to your estate. If you own your main residence and are leaving it to direct descendants (such as children or grandchildren), your estate will benefit from an additional nil rate band called the residence nil rate band of up to £175,000 (provided your total estate is less than £2m). This means that your estate could potentially benefit from a total threshold of £1m before any inheritance tax becomes payable.

Any assets left to a surviving spouse or civil partner are not subject to inheritance tax and are classed as ‘spouse-exempt’.

Your annual allowance matters because any gifts over the £3,000 threshold and within 7 years of your death will be added to the value of your estate for inheritance tax purposes. For example, if your estate is worth £320,000, and you gift your grandchild £10,000 in 2025, and die in 2026, the value of the gift will be added to your estate, less your annual allowance for that tax year:

£320,000

+ £10,000

= £330,000

– £3,000

= £327,000

Ignoring any applicable transferrable nil rate bands, exemptions and allowances carried over from previous tax years, inheritance tax at 40% would therefore be payable on the value over £325,000 at 40%, which in this case is £2,000 x 40% = £800.

The percentage of inheritance tax payable on lifetime gifts that exceed your nil rate band depends on how many years have passed between making the gift and your death. Should you die within the 3 years after making the gift, the rate of inheritance tax is 40%, while gifts made within 3 – 7 years are taxed based on a scale called ‘taper relief’:

(Gov.uk)

The key takeaway here is that if you survive 7 years after making the gift, the value won’t be added to your estate and will not be taxable. If you do not survive the gift by 7 years, the value of the gift will be counted as part of your estate after you die, subject to any taper relief. One important caveat to note is where that gift is made ‘with reservation of benefit’, which is most relevant where the gift is one of property. If you gift property but continue to enjoy use of it, the value of that gift will remain within your estate for inheritance tax purposes. The rules on gifts with reservation of benefit are complex and beyond the scope of this article, but should you wish to discuss this further, please get in touch.

How Else Can I Gift Inheritance Tax-Free?

Regular Gifts out of Surplus Income

You can gift part of your regular taxed income away to your grandchildren to help them with their living expenses. To ensure your beneficiary does not pay tax on the gift, the pattern of gifts must be consistent and regular, not sporadic. Monthly gifts towards rent or education costs would be considered consistent, while a one-off lump sum would not. You must also be able to prove that any gifts are made from your surplus income and do not affect your standard of living. It is advisable to keep records of the details of any such gifts, and to write a letter of intent to the beneficiary of the gift, stating that the gifts are made from surplus income as evidence to present to HMRC after your death.

Premium Bonds

You can buy Premium Bonds for your child or grandchild from NS&I. Although they do not generate interest, each bond gives the holder a chance to win up to £1m in prizes tax-free.

Life Insurance

Any child or grandchild can be named as a beneficiary on your life insurance policy, and you can name as many beneficiaries as you like to ensure that they receive the payout on your death.

Conclusion

The best option for gifting will depend on your circumstances and what you want to achieve from the gift. It is crucial to obtain professional advice to make sure you follow the rules around gifting and avoid an unexpected inheritance tax bill for your estate after your death.

At Wilson Browne, we are experienced in providing tailored solutions to help you provide for your family for the future. Contact our team today to book an appointment with an expert from our Private Client team.