Gifting money to your children: Inheritance Tax rules explained

Passing wealth on to the people you care about is one of the most meaningful parts of financial planning. But without the right planning, a significant portion of what you’ve worked so hard to build could be lost to Inheritance Tax (IHT). Understanding the rules around gifting money to your children is an important first step. Done thoughtfully, it can help ensure more of your wealth reaches the people you intend it for.

At Beaumont Wealth, we work with families across Shropshire, Cheshire, and North Wales to help them navigate estate and Inheritance Tax planning with confidence and clarity. In this article, we outline the key rules around gifting, explain how they fit within the wider IHT framework, and highlight practical steps to help you make full use of the available allowances.

Why gifting matters for Inheritance Tax planning

Inheritance Tax is charged at 40% on the value of your estate above the nil-rate band of £325,000. With the residence nil-rate band potentially adding a further £175,000 for those passing on a family home to direct descendants, some estates will be fully covered by these allowances, but many will not. Increases in property prices, accumulated savings, and investment growth mean that more families are now facing a potential Inheritance Tax liability.

One of the most effective and accessible ways to reduce your IHT liability is by transferring assets to your children or other loved ones while you are still alive. This is known as lifetime gifting. Done carefully and in accordance with HMRC’s rules, this can meaningfully reduce the value of your estate and the tax bill your beneficiaries may ultimately face.

The seven-year rule: Potentially Exempt Transfers (PETs)

The cornerstone of IHT gifting rules is the seven-year rule. Any gift you make to another individual, including your children, is known as a Potentially Exempt Transfer (PET). As the name suggests, these gifts have the potential to become fully exempt from IHT, provided you survive for at least seven years after making them.

If you die within seven years of making a gift, the amount gifted may be brought back into your estate and subject to IHT. However, the amount of tax owed reduces on a sliding scale, known as taper relief.

It is important to note that taper relief only applies to the tax due on the gift itself, not to your estate’s nil-rate band. The nil-rate band is used against gifts in chronological order, which can affect how much relief is actually available.

Annual exemptions and other allowances

Alongside PETs, HMRC provides a range of gifting allowances that are immediately exempt from IHT, regardless of how long you survive after making them. Making full use of these each year is a straightforward and effective part of any estate planning strategy.

Annual exemption

Each tax year, you can give away up to £3,000 in gifts free of IHT. If you don’t use it in one tax year, you can carry it forward to the next, but only for one year, meaning the maximum you can give under this allowance in a single year is £6,000.

Small gifts exemption

You can give up to £250 to as many different individuals as you like each tax year, entirely free of IHT. This cannot be combined with the annual exemption for the same recipient.

Wedding and civil partnership gifts

If your child is getting married or entering a civil partnership, you can give them up to £5,000 tax-free. Grandparents can give £2,500, and others up to £1,000.

Gifts out of normal expenditure

If you can demonstrate that regular gifts are made out of your normal income, not capital, and that they do not affect your standard of living, those gifts can be completely exempt from IHT with no upper limit.

Common pitfalls to be aware of

• Gifting too much capital too soon, leaving insufficient funds for your own needs.
• Failing to keep records of gifts.
• Assuming all gifts are automatically exempt.
• Triggering other taxes such as Capital Gains Tax.
• Overlooking how gifts interact with the nil-rate band.