Inheritance and Gifting: How to Gift Money to Your Children Legally

Are you thinking about gifting money to children but unsure of the tax implications? Understanding the rules around financial gifts, and how they interact with inheritance law and Inheritance Tax, is essential to making the most of your gift.

In this guide, updated for the 2025–26 tax year, we explain the main factors to consider before making a gift, from annual exemptions to the seven-year rule, and how to choose the most effective and tax-efficient way to give money to your children.

Inheritance tax (IHT) in short: what it is and how it works

Inheritance tax (IHT) is a taxation on the value of a person’s estate, calculated at the time of death, and includes real estate, savings, investments and other assets. In the United Kingdom, the amount payable depends on: – the size of the estate – deductions, thresholds and allowances – how the assets are distributed

Key thresholds and deductions for 2025-26

• Nil-Rate Band (NRB) of £325,000 for each person. If the value of the estate is less than this amount, no inheritance tax is payable.
• Residence Nil-Rate Band (RNRB), of £175,000 on top of the NRB, which applies if you transfer your main residence to a direct descendant (e.g. a child or grandchild).
• Couples’ allowance: married couples and civil partners can combine their NRB and RNRB, potentially transferring up to £1 million tax-free. Any allowance not used by one partner can be transferred to the other.

Standard IHT rate

The standard IHT rate is 40% on the value of the estate exceeding the available allowances, reducible to 36% if at least 10% of the net estate is left to charity.

Exemptions and relief

• Spouse or civil partner: transfers between spouses or civil partners who are UK residents are exempt from IHT.
• Charitable gifts: gifts to UK-registered charities are exempt from IHT.
• Business and agricultural property: certain qualifying assets may be wholly or partially exempt from IHT.

Gifting money to your children: 2025-26 rules and legal procedures

Many parents and grandparents choose to leave money to their children after their death. It is a convenient way of investing for children.

But there is a growing trend to gift money before parents or grandparents die. Many give the gift of premium bonds to children, Others may decide to open a child’s savings account.

Whether you decide to gift money to children through your last will and testament as part of your estate or earlier, you need to know how to navigate the tax rules. So first, let’s look at inheritance tax, sometimes referred to as hereditary tax in the UK.

Can I gift money to my children via my last will and testament?

Yes, you can, and there is one important, fundamental rule whereby inheritance tax gifts to children will be exempt from inheritance tax (IHT for short)– if the total value of your estate is less than £325,000.

This is the inheritance tax allowance if no property is included in the estate. If property is included, the allowance increases to £500,000. Any excess over and above these allowances, and the answer to the question, “How much inheritance tax will be deducted,” is 40%, unless the excess goes to your spouse, civil partner, a charity, or an amateur community sports club.

It’s also worth knowing that if the IHT threshold belonging to your spouse or civil partners wasn’t used to its maximum, the unused value could be added to your own IHT threshold.

Technically, any money you bequeath in your will is not counted as a gift but as part of your estate and is subject to inheritance tax rules.

UK rules outside inheritance tax to gift money to your children

How much money can you gift your children or grandchildren tax-free while you are still alive? It varies, as you will see when you read on, but you need to be aware that it can be subject to tax as a Potentially Exempt Transfer (PET) depending on the amount, and something called the 7-year rule.

The 7-year rule explained

If you die 7 years or more after you have gifted money to your children or grandchildren, it will not be subject to IHT. However, inheritance tax could be due if you die before seven years have elapsed.

 So, if you’re asking yourself, “Can I gift money to my children tax-free?” – you can, but it depends on something called “taper relief”.

In terms of years before your death, the rate at which taper relief comes into play is as follows:

PET taper relief only comes into consideration when the total amount of money gifted during the seven years preceding your death is over the £325,000 threshold.

Impact on family assets and estate planning

If you regularly make the most of your £3,000 per annum tax-free gift allocation, it’s important to fully understand the 7-year rule because it could potentially impact both the family assets and your estate planning. The more you gift, the less your estate could be worth, but on the other hand, the longer you survive such gifts, the less IHT tax will be due.

How much can you gift tax free?

The  limit is currently set at £3,000 per tax year. If you have more than one  child, the £3,000 can be split among them.

This sum is what is referred to as your “annual exemption”: if you don’t fully use it in one year, you can roll on the balance to the next tax year only meaning that you can transfer up to £6,000 tax free .

You can also make use of your small gift allowance: this covers a maximum of £250 per tax year, and can be used if you haven’t used any other tax allowances for the same child.

What other gifts for children are tax free?

As mentioned earlier, you can bequeath your children or grandchildren up to £325,000 tax-free in your will as part of your estate. 

But, of course, your estate also covers other things. When considering gifts and inheritance tax relating to your estate, it’s not only money you can include. Other things apply too, such as property and land, personal items (antiques, furniture, jewellery, etc.), and stocks and shares listed on the LSE.

Wedding gifts- including civil partner agreements

If you’re wondering, “Can I gift money to my children as wedding gifts or civil partnership gifts when the partnership is initially formed? – the answer is yes, you can. The rules are as follows:

• To your child – £5,000
• To your grandchild or great-grandchild – £2,500
• To another child (or person) – £1,000

These wedding or civil partnership tax-free allowances can be combined with any other tax-free allowance except the small gift allowance.

Paying regular gift money to your children

You can also regularly gift money to children to help with their costs of living. There is no ceiling to this, and it’s tax-free, provided you can afford such payments and pay them out of your regular monthly income, on which of course you have already paid tax.  This “normal expenditure out of income” gift can be used to pay for the following.

Can I gift money to my children for education or housing?

Two of the biggest financial challenges any child will face in their lifetime are the cost of education and rent costs. Regular gift money can be offered to help with both, and this can come from parents and grandparents.

Providing a monthly allowance for children who become university students can be of huge benefit to the child. But because grandparents want to ensure that the money is used for the right causes and is not just frittered away, you might want to pay for specific expenses such as accommodation or monthly supermarket bills. Whatever you decide as a grandparent, it’s a good idea to have a discussion with the child’s parents first.

Gifting money into a child’s savings account

It is also possible to gift money to a child’s savings account, but it is important to choose the right type of account.

Ordinary savings accounts for children and babies often offer low interest rates and risk losing value in real terms due to inflation. 

For long-term savings, you may want to consider tax-efficient options such as a Junior ISA (annual allowance of £9,000 for 2025-26) or a bare trust, which can offer better growth potential and protect returns from tax.

The amount you can give also depends on the source of the funds:

• contributions from excess income that are paid regularly: these benefit from the exemption for normal expenses charged against income and are immediately excluded from the estate for inheritance tax purposes;
• contributions from savings or capital may be subject to other IHT rules, such as the annual exemption of £3,000 or the seven-year rule.

Key differences between regular lifetime donations and inheritance

When should you start gifting money to children?

• Start early if possible, the earlier you begin, the more time investments have to grow, and the greater the potential benefit from compounding.
• Consider a Junior ISA (JISA): annual allowance is £9,000 for 2025–26.
• Cash JISA: lower risk, but interest rates may be modest and could be eroded by inflation.
• Stocks and Shares JISA: potentially higher returns over the long term, but carries investment risk.
• Use available exemptions and allowances: combine JISA contributions with other tax-free gift allowances (e.g., £3,000 annual exemption) where appropriate.

How to mitigate risk in investments: 

• Diversify across different asset types.
• Invest for the long term; JISA funds are locked until the child turns 18.

If you are unsure how to invest or make the best use of allowances, consult an FCA-authorised financial adviser.

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