Can I Give Money to My Children Without Paying Inheritance Tax

Introduction

Inheritance Tax applies to the value of your estate when you die, which includes money, property, and other assets. However, not all gifts you make during your lifetime are taxable. The UK tax system allows a range of exemptions and reliefs so you can pass on wealth to your children without immediately incurring tax.

The key is to understand how the seven-year rule and annual gift exemptions work.

What counts as a gift for Inheritance Tax purposes

For Inheritance Tax, a gift is anything of value you give away, such as:

Cash or bank transfers.

Property or land.

Personal items like jewellery or art.

Forgiven debts or interest-free loans.

Selling something to someone for less than its market value.

Gifts can be made to anyone, including your children, but HMRC applies specific rules to determine whether they are taxable.

The annual gift allowance

Each tax year, you can give away up to £3,000 in total without it being added to your estate for Inheritance Tax purposes. This is known as your annual exemption.

You can split the £3,000 between several recipients or give it all to one person. If you do not use the exemption in one year, you can carry it forward to the next year, allowing a potential total of £6,000 in one tax year.

For example, if you did not make any gifts last year, you could give £6,000 to your child this year without affecting your estate’s Inheritance Tax position.

Small gift exemption

In addition to the annual exemption, you can give small gifts of up to £250 per person per tax year to as many people as you like, provided you have not used another exemption for the same recipient.

This is useful for birthday or Christmas presents to children and grandchildren.

Wedding and civil partnership gifts

You can make tax-free gifts to your children when they marry or enter a civil partnership. The limits are:

£5,000 for a child.

£2,500 for a grandchild or great-grandchild.

£1,000 for anyone else.

These gifts must be made close to the wedding or civil ceremony to qualify for exemption.

Regular gifts from income

If you have a regular surplus from your income (not capital), you can make regular gifts that are exempt from Inheritance Tax, provided they do not affect your standard of living.

This exemption applies to things like:

Paying into a child’s savings account regularly.

Covering school fees or living expenses.

Making monthly transfers for general support.

To qualify, the payments must come from your after-tax income and not reduce your overall wealth. Keeping records showing that these gifts were part of your normal expenditure is essential in case HMRC reviews your estate later.

The seven-year rule for larger gifts

If you give more than your annual exemptions allow, the gift is known as a Potentially Exempt Transfer (PET). This means it will only become completely tax free if you survive for seven years after making it.

If you die within seven years, the gift may be subject to Inheritance Tax, depending on its value and how long ago it was made.

Taper relief

If you die between three and seven years after making a large gift, taper relief may reduce the amount of tax due. The relief applies on a sliding scale:

0 3 years: 40 percent tax (no relief).

3 4 years: 32 percent.

4 5 years: 24 percent.

5 6 years: 16 percent.

6 7 years: 8 percent.

After 7 years: 0 percent (no tax).

Taper relief only reduces the tax on the gift, not the value of the gift itself, and it applies only if the total value of gifts made within seven years exceeds the Inheritance Tax threshold (£325,000 for most people).

Gifts between spouses or civil partners

Gifts between spouses or civil partners are always free from Inheritance Tax, provided both partners are permanently living in the UK.

This means you can transfer money or property to your spouse at any time without it affecting your IHT position.

Using trusts to gift money

Some parents use trusts to pass money to their children while retaining some control over how and when it is used. Trusts can offer tax advantages but also come with complex rules and potential upfront tax charges.

For example, most lifetime transfers into trusts are subject to a 20 percent entry charge if the amount exceeds your nil rate band (£325,000). However, trusts can be useful for long-term estate planning or where beneficiaries are minors.

Professional advice is recommended before using a trust.

Record keeping

Good record keeping is vital. Keep detailed notes of:

The date and amount of each gift.

Who received it.

The reason for the gift (for example, wedding or birthday).

Whether it came from income or savings.

This information will make things much easier for your executors and help demonstrate to HMRC that the gifts were made within the rules.

Example scenarios

Example 1: Annual exemption and small gifts

You give each of your two children £1,500 in the current tax year. That totals £3,000, which falls within your annual exemption, so it is immediately free of Inheritance Tax.

Example 2: Larger gift and seven-year rule

You give your daughter £50,000 to buy a house. This exceeds your annual exemption, so it is a Potentially Exempt Transfer. If you live for seven years after the gift, it becomes fully exempt. If you die within five years, some Inheritance Tax may be due, depending on the rest of your estate.

Common mistakes to avoid

Assuming all gifts to family are automatically tax free.

Forgetting to record the date and purpose of large gifts.

Mixing regular income gifts with lump-sum gifts from savings.

Ignoring the seven-year rule for significant transfers.

Conclusion

You can give money to your children without paying Inheritance Tax by using the available exemptions, such as the annual £3,000 allowance, small gifts, wedding gifts, or regular payments from income. Larger gifts can also escape tax if you live for seven years after making them.

By planning ahead, keeping good records, and understanding the limits, you can pass on wealth to your children efficiently and reduce potential Inheritance Tax liabilities. If your estate or gifting plans are substantial, professional advice from a financial planner or tax adviser can help you make the most of these reliefs and stay compliant with HMRC rules.