Inheritance Tax Planning

Tax Implications of Gifting Money to Children

Gifting money to your children or grandchildren is one of the most effective ways to reduce your estate for inheritance tax purposes — but the rules are complex. This guide explains what you can give, when, and how to do it tax-efficiently.

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IHT-Exempt Gift Allowances

Several categories of gift are fully exempt from inheritance tax. Understanding these allowances is the starting point for any gifting strategy.

Annual Exemption — £3,000

Each tax year you can give away up to £3,000 in total free of IHT. Unused allowance can be carried forward one year, giving a potential £6,000 in year two.

Most commonly used

Small Gift Allowance — £250

You can give up to £250 to as many individuals as you like each tax year, provided you have not used another exemption for the same person.

Wedding / Civil Partnership Gifts

Up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else — given on or shortly before the wedding.

Normal Expenditure Out of Income

Regular gifts made from surplus income (not capital) can be fully exempt — with no upper limit — provided they do not reduce your standard of living.

Most commonly used

Potentially Exempt Transfers (PETs)

Larger gifts become fully exempt if you survive 7 years after making them. If you die within 7 years, taper relief may reduce the IHT due.

Junior ISA — Up to £9,000/year

Contributions to a child's Junior ISA count as gifts but grow tax-free. The annual JISA allowance for 2026/27 is £9,000 per child.

The 7-Year Rule Explained

Any gift above your annual exemption is a potentially exempt transfer (PET). It becomes fully exempt from inheritance tax if you survive for 7 years after making it.

If you die within 7 years, the gift may be brought back into your estate for IHT purposes. However, taper relief reduces the rate of tax if you survive between 3 and 7 years.

Taper relief only applies where the total value of gifts in the 7 years before death exceeds the nil-rate band (currently £325,000). It reduces the rate of IHT on the gift — not the value of the gift itself.

Important: Gifts with reservation — where you give something away but continue to benefit from it — do not qualify as PETs and remain in your estate regardless of when they were made.

Taper Relief Rates

Years between gift and death	IHT rate on gift
Less than 3 years	40%
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 years or more	0%

Source: HMRC. Rates apply where total gifts exceed the £325,000 nil-rate band.

Ways to Gift Money to Children

There is no single best way to gift money to children. The right approach depends on the amount, the child's age, your IHT position, and how much control you want to retain.

Junior ISA (JISA)

Advantages

Tax-free growth
Up to £9,000/year
Child controls at 18

Considerations

Locked until age 18
Cannot be withdrawn early

Best for: Long-term savings for children

Bare Trust

Advantages

Flexible investment
Child entitled at 18
No IHT if donor survives 7 years

Considerations

Child gains full control at 18
Settlor's income tax rules apply

Best for: Larger lump sums for grandchildren

Discretionary Trust

Advantages

Trustees control distribution
Protects vulnerable beneficiaries
Flexible for multiple children

Considerations

Immediate IHT entry charge if over nil-rate band
Ongoing trust administration

Best for: Protecting assets for younger or vulnerable children

Direct Cash Gift

Advantages

Simple and immediate
Uses annual exemption
No ongoing administration

Considerations

No control over how money is spent
Larger gifts subject to 7-year rule

Best for: Smaller regular gifts within annual exemption

Normal Expenditure Out of Income

This is one of the most powerful — and most underused — IHT exemptions available. If you make regular gifts from your surplus income, those gifts can be fully exempt from inheritance tax with no upper limit.

To qualify, the gifts must:

Be part of a regular pattern of giving (habitual)
Be made from income — not from capital or savings
Not reduce your standard of living

Examples include paying into a child's Junior ISA each month, paying school fees from income, or making regular contributions to a grandchild's savings account. Detailed records are essential — your executors will need to demonstrate the pattern of giving to HMRC.

Planning tip

Keep a simple spreadsheet recording each gift — the date, amount, recipient, and the income source. This makes it straightforward for your executors to claim the exemption on your IHT return. We can advise on the record-keeping requirements and help you structure a regular gifting programme.

Frequently Asked Questions

How much can I give my child tax-free each year?

You can give up to £3,000 per tax year free of inheritance tax using your annual exemption. If you did not use last year's allowance, you can carry it forward once, giving up to £6,000 in a single year. You can also give up to £250 to as many individuals as you like under the small gift allowance.

What is the 7-year rule for gifts?

Gifts above your annual exemption are known as potentially exempt transfers (PETs). They become fully exempt from inheritance tax if you survive 7 years after making the gift. If you die within 7 years, the gift may be subject to IHT — but taper relief reduces the rate if you survive between 3 and 7 years.

Can I give money to my grandchildren tax-free?

Yes. The same exemptions apply to gifts to grandchildren. You can also give up to £2,500 as a wedding gift to a grandchild. Larger gifts are potentially exempt transfers subject to the 7-year rule.

What is "normal expenditure out of income"?

This is a valuable but often overlooked exemption. Regular gifts made from your surplus income — not your capital — can be fully exempt from IHT with no upper limit. The gifts must be habitual (part of a regular pattern), made from income, and must not reduce your standard of living. Careful record-keeping is essential.

Does a Junior ISA count as a gift?

Yes. Contributions to a child's Junior ISA are treated as gifts for IHT purposes. However, they will typically fall within your annual exemption or the small gift allowance. The money grows tax-free within the JISA and cannot be accessed until the child turns 18.

Should I use a trust to gift money to my children?

A trust can give you more control over how and when the money is used — particularly useful for younger children or where you want to protect assets from divorce or bankruptcy. The right type of trust depends on your circumstances. We recommend taking specialist legal advice before setting up any trust.

What records should I keep of gifts?

You should keep a written record of all gifts — what was given, to whom, the value, and the date. This is essential for your executors to complete the IHT return after your death. Without records, gifts may be overlooked or incorrectly valued, potentially leading to an incorrect IHT calculation.

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