Gifting to Children and Grandchildren: How to Cut Your Inheritance Tax Bill

Gifting to Children and Grandchildren: How to Cut Your Inheritance Tax Bill

Let’s be honest, nobody likes paying more tax than necessary—especially after you’ve worked hard your whole life to build your savings. The good news is the UK government actually encourages you (yes, really!) to pass some of your wealth to your children or grandchildren tax-efficiently. Here’s how you can do it smartly.

First Things First: What’s the Deal with Gifting?

When you give money or assets to your loved ones while you’re alive, it can potentially reduce the size of your estate—and thus your inheritance tax (IHT) bill after you're gone. But like everything tax-related, there are rules. Thankfully, they're not as complicated as they first appear.

The Seven-Year Rule (Potentially Exempt Transfers)

The big one is called the seven-year rule. In short:

• If you gift an asset or money and survive for seven years after the gift, it becomes completely exempt from IHT.

• If you pass away within seven years, the gift may be partially taxable (though the tax due reduces gradually after the third year).

Annual Gift Allowances (The Easy Bit)

Every year, you're allowed to gift £3,000 tax-free to anyone you choose. This is called your “annual exemption.”

• If you didn’t use it last year, you can carry it forward (but only one year).

• Couples each have their own £3,000 allowance—so together you can give away £6,000 each year, tax-free.

Extra Allowances: More Ways to Save

Beyond your annual exemption, there are a few extra generous allowances:

• Small gifts: You can give as many £250 gifts per person per year as you want, as long as that person hasn’t benefited from your £3,000 annual exemption.

• Wedding gifts: You can gift tax-free amounts when your loved ones marry:

  • Up to £5,000 to your child.

  • Up to £2,500 to your grandchild or great-grandchild.

  • Up to £1,000 to anyone else.

Regular Gifts from Surplus Income (The Big Secret!)

Here’s a very useful, lesser-known tip:

You can give away an unlimited amount of money as long as it meets these three key conditions:

• It’s from your surplus income (meaning you maintain your standard of living without dipping into savings).

• It’s done regularly (monthly, quarterly, or annually).

• You keep clear records to prove these conditions are met.

This is a powerful (and completely legal) way to pass money regularly to your family without worrying about inheritance tax.

The Importance of Keeping Records

HMRC is strict. To avoid disputes, clearly document:

• The amounts gifted.

• Your income and expenses, proving the surplus.

• A clear, regular gifting pattern (such as monthly payments into your grandchild’s savings account).

Trusts: Another Smart Option

Gifts can also be made into a trust—great for managing how and when younger family members access the money. Remember, the seven-year rule usually applies here too.

Common Mistakes (and How to Avoid Them)

• Don't gift assets you still need: You must genuinely afford to give the money or assets away without hardship.

• Don't assume you’ll outlive the seven years: Consider the potential tax consequences and plan accordingly.

Bottom Line: Gift Wisely, Save Big

By carefully using these simple gifting rules, you can significantly shrink your estate's inheritance tax bill and help your loved ones now, when they might need it most. It's practical, smart, and—let’s be honest—pretty satisfying.

So, go ahead and gift (responsibly, of course). Your children, grandchildren, and future self will thank you.