Ask ii: how can I gift money to my children tax efficiently?

A reader asks: “My husband and I are worried about lumping our two adult children with a nasty tax bill after we’ve passed, so are considering the options to give money to them while we’re alive. I also feel this is a good time to support them financially as neither has bought a property yet and are paying sky-high rent. I understand there are ways to pass on wealth to avoid inheritance tax (IHT), but I keep getting in a muddle as IHT is such a minefield. I’ve become even more confused after the Budget. I’ve also read something about incurring other taxes in the process, which is an additional concern.”

Craig Rickman, personal finance editor at interactive investor (pictured above), says: Firstly, it’s great that you’re weighing up ways to minimise how much inheritance tax (IHT) your children might pay.

In the absence of savvy tax planning, the prospect of HMRC taking a large chunk of your hard-earned wealth once you die, leaving less for your offspring, is very real.

As you mention, complexities within the IHT landscape don’t make things easy. It is hideously knotty in parts, and the waters have become muddier since the Autumn Budget.

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On a more encouraging note, IHT remains one of the easier taxes to avoid. You just need to know what to do, and how to go about it.

Along with spending money, gifting is among the most effective tactics to mitigate IHT. There are, however, some key things to get your head around first. Let’s run through the main options and considerations. To be clear, this merely provides an outline of the available options and should not be construed as personal advice.

What is your tax-free allowance?

Your first port of call is to work out if you have a problem and estimate how big the problem might be. For a more detailed analysis, it’s worth seeing a tax expert, such as an accountant or financial planner – or preferably both.

To provide a basic outline of when an estate might be liable, the first £325,000 is IHT free - this is known as your nil rate band (NRB). If you own a home and leave it to direct descendants, (children, grandchildren, etc) you can get an extra £175,000 in the shape of the residence nil rate band (RNRB). As the surviving spouse can inherit the deceased’s allowances, you and your husband could potentially leave £1 million on death to your children without a penny to pay in IHT. Anything above your tax-free amount is taxed at 40%.

However, be aware the RNRB reduces by £1 for every £2 your estate exceeds £2 million, disappearing once your assets hit £2.35 million - or £2.7million if you’re married or in civil partnership.

This is important to know. If you’re caught in this punishing trap, anything you do to reduce the value of your estate, such as gifting, can save 40% in IHT and qualify for the RNRB – an effective tax saving of 60%.

What’s changing with IHT?

As you flagged in your question, sweeping IHT reforms were introduced at last year’s Autumn Budget. Some of these may not affect you, but for reference, here’s what’s changing and when they’ll take effect.

6 April 2026

• Currently, farms and businesses can be passed on IHT free provided they meet certain criteria. However, from next year, while the first £1 million of any assets will be tax free, only 50% relief – in other words, a 20% IHT rate - will apply to anything above. 
• Qualifying AIM shares, which are currently IHT exempt if held for two years, will also only receive 50% relief.

6 April 2027

• Unspent pensions will be brought into the IHT net. The value of your pension savings on death will be added to other assets and anything above your tax-free threshold that isn’t left to a spouse or civil partner will face IHT.

Rachel Reeves, the chancellor, also announced the NRB and RNRB will be frozen until 2030. This means that as asset prices rise, more estates will trip into IHT territory. The NRB has remained static since 2009, a sneaky way for governments to beef up IHT revenues without elevating the headline rate.

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What are your gifting allowances?

There is a handy selection of gifting exemptions at your disposal.

You can give away £3,000 a year (and bring forward last year’s allowance if unused), either to one person or split it between several. As you’re married, you and your husband could jointly hand £12,000 to your children in by 5 April – provided you’ve made no previous gifts – and £6,000 after. That’s £18,000 tax-free straightaway.

You can also make as many small gifts of £250 as you like (provided you haven’t used another allowance on the same individual) and you and your husband can each give £5,000 to each child for weddings – note the gift must be made on or before the big day.

Another useful rule allows you to give away as much surplus income as you like, provided the gifts are regular in nature and don’t affect your standard of living. Stringent record keeping is essential to satisfy this rule. Elsewhere, donations to a qualifying charity are also IHT exempt.

Almost every other gift is deemed “potentially exempt”. This means there will be no IHT if you survive seven years from the date you gave the money or asset away. If the value of the gift exceeds the NRB, taper relief applies to the proportion above, which gradually reduces the rate of IHT from year three onwards.

What about other taxes?

Something you’re rightly concerned about is the impact of other taxes. Not taking stock of these can mean that you may save IHT but get hit with an unwanted bill elsewhere.

Gifts to spouses or civil partners are free from IHT and there is no capital gains tax (CGT) to pay if you transfer assets between each other. This applies to both lifetime gifts and those made on death.

When passing assets to younger generations, the situation differs. While CGT never applies on death, if you gift a share portfolio to a child while you’re still alive, any gain above £3,000 (your annual CGT allowance) is taxed at 18% if it falls within the basic-rate band, and 24% on anything above.

And unless the gift is covered by any of your IHT exemptions, the seven-year rule applies.

You should therefore think carefully before passing shares to your offspring – otherwise a painful CGT bill might follow. That said, CGT rates are lower than the 40% applied to IHT, so it can still make sense in the right circumstances.

One potential strategy is to realise a profit up to your £3,000 CGTexemption every year and gift this amount to your children. This can dovetail with your £3,000 annual IHT gifting allowance, providing immediate relief from both taxes. However, if your estate happens to be rather large, the impact of this strategy on your IHT bill might be minimal.

If you’re looking to remove money from your pensions, such as a self-invested personal pension (SIPP), to pass down to younger family members, you should be mindful of income tax.

Most people can draw 25% (up to maximum of £268,275) of their total pensions, tax-free. The remaining 75% is taxed as income at your marginal rate. On income between £12,570 and £50,270 you pay 20% tax, 40% on anything above this figure and below £125,140, and 45% on income above.

If you have any unused pension tax-free cash remaining, you can draw this without HMRC taking a slice.

And in case you’re wondering, the gifts out of surplus income rule can be used when gifting pension withdrawals. But as stated above, the gifts need to be regular to qualify, so a single, large transaction might not make the cut.

A quick word on individual savings accounts (ISA). While you can’t transfer these to another person, anything you take out and give away won’t be added to your income tax or CGT bill. Unless covered by the gifting exemptions, the seven-year rule applies for IHT purposes if the money is given to children.

Are trusts a good option?

The short answer is yes – trusts can be a great way to support a child’s future, save IHT and in some cases retain a degree of control over how and when the money or assets are passed down.

However, trusts are complex legal instruments, and come in various types, so you will need to seek professional help.

Don’t gift things you can’t fully part with

An area which could trip you up is giving an asset away but continuing to receive some benefit from it. This is known as a gift with reservation of benefit, or GWROB.

For instance, you give the family home to your children but continue to live there and don’t pay the new owner a market rent. HMRC might decide the home has not left your estate and would therefore include it in the IHT calculation.

There’s more to gifting than tax

One final point – saving tax might be the trigger but there’s much more to intergenerational wealth planning. It’s also about distributing money within the family unit to help the right people at the right time.

As you mention, your children may benefit from a cash lump sum right now to lift them on to the property ladder, a task that’s become harder in the past couple of decades due to soaring house prices, and more recently, higher borrowing costs.

Making gifts while you’re alive also allows you to see your loved ones enjoy the fruits of your generosity. The added advantage is that it can reduce how much tax your children will pay once you and your husband pass. Just make sure you retain sufficient money and/or assets for your own enjoyment and lifestyle.