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Gifting Assets to Children: What You Need to Know

· 32 min

Note: The following scenario is fictional and used for illustration.

Margaret, 68, wanted to help her daughter Emma buy a house in Bristol. She gifted £150,000 from selling a buy-to-let property in 2023, delighted to support her family. When Margaret died unexpectedly 18 months later from a stroke, Emma faced a £40,000 inheritance tax bill on the gift—money she didn't have. Margaret didn't know about the 7-year rule or that gifts count toward her estate if she died within 7 years.

She's not alone. In 2020-21, over 1,300 estates paid inheritance tax on lifetime gifts—more than double the 590 estates a decade earlier. With IHT receipts hitting a record £8.2 billion in 2024/25, HMRC is scrutinizing lifetime gifts more than ever.

Gifting assets to your children can be one of the most tax-efficient ways to reduce inheritance tax and support your family's future. But get it wrong, and you could trigger unexpected tax bills, lose control of your assets, or even fail to reduce your estate's value at all. This guide explains exactly how to gift assets safely, legally, and tax-efficiently in 2025.

Table of Contents

Why Gift Assets to Children? The Benefits and Risks

IHT receipts are projected to reach £9.1 billion in 2025/26, driven by rising property values and a £325,000 nil-rate band frozen since 2009. This means more families than ever are crossing the inheritance tax threshold, facing a 40% tax bill on assets above £325,000.

Gifting assets during your lifetime offers compelling benefits:

Reduce Your Taxable Estate: Assets you give away reduce the value of your estate for inheritance tax purposes, potentially saving your family thousands in tax bills.

See Your Children Benefit Now: Rather than waiting until after your death, you can help your children buy homes, start businesses, or build financial security while you're alive to enjoy their success.

Potentially Avoid Care Home Fee Assessments: Strategic gifting well before care needs arise can legitimately reduce assets subject to means testing, though this must never be the primary motivation.

But gifting carries real risks that many overlook:

Loss of Control: Once you've given an asset away, it's gone. You can't reclaim it if your circumstances change or if you need funds for unexpected care costs.

Children's Changing Circumstances: If your child divorces, declares bankruptcy, or faces creditor claims, gifted assets could be seized by third parties.

Unexpected Tax Bills: Without proper planning, gifts can trigger capital gains tax, stamp duty, or inheritance tax charges that burden your children with bills they can't afford.

James, 62, discovered these risks the hard way. He gifted £200,000 to his son for a business venture in 2022. When the business failed spectacularly in 2024, James couldn't reclaim the funds despite needing them for his own care costs. His son had no assets left to return, and James faced the possibility of selling his home to fund care.

The key is understanding that gifting isn't a simple one-way transaction. It's a permanent transfer with tax, legal, and practical implications that require careful consideration.

The £3,000 Annual Exemption: Your Tax-Free Gifting Allowance

The annual gift exemption allows you to give away £3,000 per year tax-free, making it the foundation of smart gifting strategy. This allowance doesn't count toward your estate for inheritance tax purposes—it's completely exempt, with no 7-year wait required.

How the Annual Exemption Works:

You can give £3,000 per tax year (April 6 to April 5) to anyone you choose. You can split it among multiple children—£1,000 each to three children, for example—or give the entire amount to one person.

Carryforward Rule: If you don't use your full £3,000 allowance in one tax year, you can carry the unused portion forward for one year only. This means you could gift up to £6,000 in a single year if you didn't use any of the previous year's allowance.

Additional Gift Allowances:

Beyond the annual exemption, you can also make:

  • Small Gifts: Unlimited £250 gifts to different people each year, as long as you haven't used another allowance for that person
  • Wedding Gifts: £5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else
  • Gifts from Regular Income: Regular gifts made from your surplus income that don't affect your standard of living are immediately exempt from inheritance tax

Here's how Sarah, 65, maximizes her allowances strategically. Each year, she uses her £3,000 annual exemption to give £1,000 to each of her three children. She also gives £250 small gifts to five grandchildren at Christmas—totaling £1,250. Finally, she pays her grandson's university accommodation costs directly from her surplus income—£8,000 annually.

Total annual gifting: £12,250, all immediately exempt from inheritance tax. Over 10 years, Sarah removes £122,500 from her estate with zero tax implications.

Annual Exemptions at a Glance:

Allowance Type Amount Conditions
Annual Exemption £3,000 per year Can be split or given to one person
Carryforward Up to £6,000 Only if previous year's allowance unused
Small Gifts £250 per person Unlimited recipients, can't combine with other allowances for same person
Wedding Gifts £5,000 (child), £2,500 (grandchild), £1,000 (other) One-time per wedding
Regular Income Gifts Unlimited Must be from surplus income without affecting your lifestyle

The annual exemption is powerful precisely because it's immediate and reliable. Unlike larger gifts that require you to survive 7 years, these exemptions work instantly. Use them every year without fail—they're "use it or lose it" allowances that reset annually.

The 7-Year Rule Explained: Potentially Exempt Transfers

Once you exceed the annual allowances, gifts become Potentially Exempt Transfers (PETs). This is where the famous 7-year rule comes into play, and where many people's understanding gets dangerously fuzzy.

How Potentially Exempt Transfers Work:

When you gift assets above your annual exemptions, the gift is potentially exempt from inheritance tax—but only if you survive for 7 years after making it. If you die within those 7 years, the gift is added back to your estate's value for inheritance tax calculations.

Here's the critical detail most people miss: the gift only triggers inheritance tax if your total estate (including gifts made within 7 years) exceeds the £325,000 nil-rate band. The 7-year rule doesn't mean every gift within 7 years automatically incurs tax—it means those gifts count toward your tax-free threshold.

Taper Relief: Reducing Tax on Gifts Made 3-7 Years Before Death:

If you die between 3 and 7 years after making a gift, taper relief reduces the inheritance tax rate on that gift. Crucially, taper relief applies to the tax due, not to the value of the gift itself.

Taper Relief Rates:

Years Between Gift and Death Tax Rate on Gift
0-3 years 40% (full rate)
3-4 years 32% (20% reduction)
4-5 years 24% (40% reduction)
5-6 years 16% (60% reduction)
6-7 years 8% (80% reduction)
7+ years 0% (fully exempt)

Worked Example: Understanding the Calculation:

David gifted £425,000 to his daughter in January 2020 and died in June 2024—4 years and 5 months later. His estate at death was worth £180,000.

Here's how the inheritance tax calculation works:

  1. Total estate including gift: £180,000 + £425,000 = £605,000
  2. Deduct nil-rate band: £605,000 - £325,000 = £280,000 taxable
  3. Calculate tax at full rate: £280,000 × 40% = £112,000
  4. Apply taper relief (4-5 years): £112,000 × 60% = £67,200 tax due

Without taper relief, the tax would have been £112,000. Because David survived more than 4 years, taper relief reduced the tax bill by £44,800.

The harsh reality is that the number of estates paying IHT on lifetime gifts more than doubled from 590 in 2011-12 to 1,300 in 2020-21—a 120% increase as frozen thresholds catch more families in the tax net.

Key Takeaways:

  • PETs become fully exempt after 7 years—no tax, no reporting
  • If you die within 3 years, full 40% inheritance tax applies to amounts over £325,000
  • Taper relief gives partial relief for gifts made 3-7 years before death
  • Your estate executor must report all gifts made within 7 years on IHT forms

The 7-year rule isn't a gamble—it's a planning horizon. The healthier and younger you are when you gift, the more likely you'll survive 7 years and see the gift become fully exempt.

Gift with Reservation of Benefit: Why You Can't Have It Both Ways

This is where many well-intentioned gifting strategies fall apart completely. The gift with reservation of benefit rules prevent you from giving away assets while still enjoying their benefits. If you retain any benefit from a gifted asset, it stays in your estate for inheritance tax purposes—completely defeating the point of gifting it.

What Constitutes a Gift with Reservation:

A gift with reservation occurs when you transfer ownership of an asset to someone else but continue to benefit from it. The most common scenario is gifting your home to your children but continuing to live there rent-free.

The Most Common Mistake: Gifting Your Home:

Patricia gifted her £500,000 cottage to her daughter in 2018, believing she'd removed it from her estate for inheritance tax purposes. She continued living there as she always had, paying the bills and maintaining the property. When Patricia died in 2024, HMRC ruled it was a gift with reservation—the cottage was included in her estate, generating a £70,000 inheritance tax bill her daughter couldn't afford.

The rules are strict: if you gift property but continue living there rent-free, you're reserving a benefit. The asset remains in your estate. Period.

How to Avoid Gift with Reservation:

You have two legitimate options:

Option 1: Move Out Completely: Transfer the property and vacate it entirely. Your children gain full possession and enjoyment, and you no longer benefit. The gift succeeds, and the property leaves your estate after 7 years.

Option 2: Pay Market Rent: You can continue living in the gifted property, but you must pay your children genuine market rent. This must be a formal arrangement with a tenancy agreement. The rent you pay becomes part of your income gifts from regular income if you're giving it back to your children, or it's simply income they receive.

Other Gift with Reservation Scenarios:

The rules extend beyond property:

  • Gifting shares but retaining dividend income
  • Gifting artwork but keeping it displayed in your home
  • Gifting a holiday home but continuing to use it whenever you want
  • Gifting investment portfolios but directing how they're managed

Legitimate Sharing Doesn't Create Reservation:

You can share enjoyment of a gifted asset with your children without triggering reservation rules—if the sharing is genuine and incidental. For example, if you gift your home to your children and they invite you to visit and stay occasionally, that's fine. But you can't live there permanently or treat it as your primary residence.

Thomas gifted his £450,000 home to his two children in 2019 and moved into a rented flat. His children allowed him to visit for Sunday dinners and stay overnight occasionally when babysitting his grandchildren. This is legitimate sharing, not reservation of benefit. The gift succeeded, and the home left his estate.

The Bottom Line:

Gift with reservation rules exist to prevent double-dipping: giving assets away to avoid inheritance tax while still enjoying them as if you owned them. HMRC scrutinizes these arrangements closely. If you want the inheritance tax benefit of gifting, you must genuinely give up control and benefit of the asset.

Capital Gains Tax on Gifting Assets to Children

While everyone focuses on inheritance tax, capital gains tax often delivers a nasty surprise when gifting assets. Unlike inheritance tax, which only applies if you die within 7 years, capital gains tax can apply immediately when you make the gift.

How CGT Applies to Gifts:

When you gift an asset to your children, HMRC treats it as a disposal at market value for capital gains tax purposes—even though no money changes hands. You're deemed to have sold the asset for its current worth, and any gain since you acquired it may be taxable.

CGT Rates (2025):

  • Residential property: 18% (basic rate taxpayers) or 24% (higher rate taxpayers)
  • Other assets: 10% (basic rate) or 20% (higher rate)

Critical Exception: Your Main Home:

Your principal private residence is usually exempt from capital gains tax under Principal Private Residence Relief. If you gift your main home to your children, you typically won't face CGT. But this exemption doesn't apply to second homes, buy-to-let properties, or investment assets.

Worked Example: Buy-to-Let Property:

Michael bought a buy-to-let flat in Manchester for £200,000 in 2010. It's now worth £400,000, and he wants to gift it to his son. The £200,000 gain triggers capital gains tax.

As a higher rate taxpayer, Michael faces:

  • Gain: £400,000 - £200,000 = £200,000
  • CGT at 24%: £200,000 × 24% = £48,000

Michael must pay £48,000 in capital gains tax on a gift where no money changed hands. His son receives a £400,000 property, but Michael faces a substantial tax bill.

Hold-Over Relief: Deferring CGT Liability:

Hold-Over Relief allows you to defer capital gains tax liability when gifting business assets or shares. The liability passes to the recipient, who pays CGT when they eventually sell the asset.

Hold-Over Relief is available for:

  • Gifts of business assets or shares in your personal trading company
  • Gifts of agricultural property
  • Gifts to trusts in some circumstances

Critically, Hold-Over Relief generally doesn't apply to:

  • Residential property (except in very specific business contexts)
  • Cash gifts
  • Personal possessions

Capital Gains Tax vs. Inheritance Tax:

Asset Type CGT on Gift? IHT on Gift?
Main Home Usually exempt (PPR Relief) Subject to 7-year rule
Buy-to-Let Property Yes (18% or 24%) Subject to 7-year rule
Shares Yes (10% or 20%), may claim Hold-Over Relief Subject to 7-year rule
Business Assets Yes, but Hold-Over Relief available Subject to 7-year rule
Cash No CGT Subject to 7-year rule

The Strategic Trap:

Many people gift assets to reduce inheritance tax without realizing they're triggering immediate capital gains tax. You might successfully remove a buy-to-let property from your estate, only to face a £50,000 CGT bill that wipes out years of inheritance tax savings.

Before gifting assets with significant gains, calculate the CGT liability and consider whether Hold-Over Relief applies. In some cases, it's better to retain assets until death, when beneficiaries receive them at a stepped-up basis for CGT purposes—meaning no CGT on pre-death gains.

Gifting Property: Stamp Duty, Mortgages, and Ownership Issues

Gifting property creates unique complications beyond inheritance tax and capital gains tax. Understanding stamp duty implications, mortgage complications, and ownership risks is essential before transferring property to your children.

Stamp Duty Land Tax (SDLT) on Gifts:

Pure gifts of property with no money changing hands are generally exempt from SDLT. If you transfer your property to your children as a gift, they typically won't pay stamp duty.

However, if your children assume a mortgage as part of the gift, SDLT may apply on the mortgage amount.

Helen gifted her £350,000 house to her son in 2024. The property had a £150,000 outstanding mortgage. Her son didn't pay Helen anything, but he assumed responsibility for the £150,000 mortgage.

For SDLT purposes:

  • The gift itself: Exempt
  • The assumed mortgage: Potentially subject to SDLT if it exceeds the £250,000 threshold

In this case, the £150,000 mortgage is below the threshold, so no SDLT applies. But if the mortgage were £300,000, SDLT would be due on the portion exceeding £250,000.

Legal Transfer Requirements:

Transferring property ownership requires:

  • Solicitor to handle the legal transfer
  • Land Registry registration of the new owner
  • Transfer deed (Form TR1)
  • Notification to mortgage lender (if applicable)

Expect legal costs of £500-£1,500 for a straightforward gift transfer.

Ownership Risks for Your Children:

Once your children own the property, it becomes part of their assets. This creates exposure to:

Creditor Claims: If your child faces bankruptcy, creditors can force the sale of the property to satisfy debts.

Divorce Settlements: In divorce proceedings, the gifted property may be included in financial settlements, potentially meaning your former son- or daughter-in-law receives a share.

Forced Sale: If you gift property to multiple children and one wants to sell, they can apply for a court order to force the sale even if others don't want to sell.

The "Discount Gift" Alternative:

If you need to extract some cash while still reducing your estate, consider a discount gift: gift part of the property's value and sell the rest.

Robert owned a £400,000 house. He gifted 50% to his daughter (£200,000 gift, subject to 7-year rule) and sold her the other 50% for £200,000. Robert received £200,000 cash, his daughter gained full ownership, and his estate was reduced by the £200,000 gift portion.

This strategy provides liquidity while still achieving inheritance tax reduction—though capital gains tax may apply to the sale portion if it's not your main home.

Before Gifting Property, Consider:

  • Can you afford to lose this asset permanently?
  • Do you trust your children's financial stability and judgment?
  • What happens if your child divorces or faces financial difficulties?
  • Have you calculated CGT liability if it's not your main home?
  • Does the property have a mortgage, and can your children assume it?

Property gifting is irrevocable. Once transferred, you can't reclaim it if circumstances change. Make absolutely certain this is the right move for your long-term financial security.

Avoiding Care Home Fee Traps: Deliberate Deprivation of Assets

This is the most dangerous misconception in estate planning: the belief that gifting assets will protect them from care home fees. The reality is starkly different, and getting it wrong can leave your family worse off than if you'd never gifted anything at all.

What is Deliberate Deprivation of Assets?

Under the Care Act 2014, local authorities have the power to treat you as still owning assets if they believe you deliberately gave them away to avoid paying for care. This is called "deliberate deprivation of assets."

If the council determines you transferred assets primarily to avoid care fees, they can:

  • Include those assets in their financial assessment as if you still owned them
  • Require you to contribute to care costs based on the notional value of the transferred assets
  • Potentially seek repayment from the person who received the assets

The Two-Part Test:

Local authorities assess deliberate deprivation using two key questions:

  1. Intent: Did you give away the assets to avoid care fees?
  2. Foreseeability: Could you reasonably have foreseen needing care when you made the gift?

You don't need to have been diagnosed with a condition or explicitly stated your intention to avoid care fees. If the timing and circumstances suggest avoidance, the council can rule against you.

The Cautionary Tale:

Robert, 78, gifted his £400,000 home to his children in January 2024. In March 2024, he was diagnosed with advanced dementia and required residential care. The council investigated the gift and ruled it was deliberate deprivation—the short time between the gift and care need, combined with Robert's age and emerging symptoms, indicated he likely foresaw needing care.

Result: Robert's family was still required to contribute to care fees based on the £400,000 value, as if Robert still owned the home. The gift failed to protect the assets and created a financial nightmare.

What Matters: Timing and Motivation:

The earlier you gift assets, and the clearer your estate planning motivation, the safer you are:

Lower Risk:

  • Gifts made 10+ years before care needs arise
  • Gifts made as part of documented long-term inheritance tax planning
  • Gifts to help children buy homes or start businesses (legitimate family support)
  • Gifts made when you're healthy with no care needs on the horizon

Higher Risk:

  • Gifts made within 1-3 years of entering care
  • Gifts made after diagnosis of conditions likely to require care (dementia, Parkinson's, etc.)
  • Large gifts made suddenly without established gifting pattern
  • Gifts made immediately after financial assessments for care

Legitimate Estate Planning vs. Avoiding Care Costs:

The key distinction is primary motivation. If your primary goal is inheritance tax planning or supporting your family, and avoiding care costs is merely an incidental benefit, that's legitimate. But if your primary purpose is protecting assets from care fees, it's deprivation.

Emma, 63, had been gifting £3,000 annually to her two children for 15 years as part of her inheritance tax planning. When she needed care at 79, the council accepted these gifts as legitimate long-term estate planning, not deliberate deprivation. The pattern, timing, and clear IHT motivation protected her.

What Happens If Deprivation Is Found:

If the local authority determines deliberate deprivation:

  • They conduct a "notional capital assessment"—calculating what you'd pay if you still owned the assets
  • You're required to make care contributions as if the assets were never gifted
  • The council may pursue the recipients (your children) to recover care costs under Section 70 of the Care Act 2014
  • Your children could face legal action to repay funds equal to the local authority's increased costs

The Safe Approach:

If care needs are a realistic possibility in the foreseeable future (you're over 70, have health issues, or have family history of conditions requiring care), do not gift assets primarily to avoid care fees. It will likely fail, and you'll have given away assets you need while still being liable for care costs.

If you're younger and healthy, gifting as part of long-term inheritance tax planning is legitimate—but document your motivations clearly and establish a consistent pattern of gifting over many years.

How to Gift Assets Safely: A Step-by-Step Strategy

Successful gifting requires a methodical approach that balances generosity with protecting your own financial security. Follow these eight steps to gift assets safely and effectively.

Step 1: Calculate What You Can Afford to Give

Never gift money or assets you might need. This sounds obvious, but emotional pressure from children or desire to reduce inheritance tax leads many people to over-gift.

Calculate:

  • Your annual living expenses
  • Potential care costs (average £40,000-£60,000 per year for residential care)
  • Emergency funds (at least 6 months' expenses)
  • Future medical or home adaptation costs

Only gift from genuine surplus—assets you can afford to lose permanently.

Step 2: Use Annual Exemptions First

Start with your £3,000 annual exemption every year without fail. These gifts are immediately exempt from inheritance tax with no 7-year wait. If you're married, your spouse has a separate £3,000 allowance, allowing £6,000 per year total.

Add £250 small gifts to as many people as you like, and use wedding gift allowances when applicable.

Step 3: Consider Gifts from Surplus Income

If you have regular surplus income—pension income you don't need, rental income beyond your living expenses—you can make unlimited gifts from this income that are immediately exempt from inheritance tax.

Critical requirements:

  • Gifts must be regular (annual or more frequent)
  • Made from income, not capital
  • Must not reduce your standard of living

Document these gifts meticulously. Keep records showing your income, living expenses, and regular gift pattern.

Step 4: For Larger Gifts, Accept the 7-Year Wait

Gifts above annual allowances become potentially exempt transfers. Accept that you need to survive 7 years for them to become fully exempt. The healthier and younger you are, the better your odds.

Don't gift so much that you'd need the money back if circumstances change. Once gifted, it's gone.

Step 5: Document Everything

Create a gift log recording:

  • Date of gift
  • Amount or asset description
  • Market value at time of gift
  • Recipient
  • Which exemption used (annual, small gift, wedding, etc.)

Your executor will need this information to complete inheritance tax forms. Proper documentation also supports your case if there's ever a deliberate deprivation challenge from a local authority.

Step 6: Review Tax Implications Before Gifting

Before gifting assets other than cash, calculate:

  • Capital gains tax liability (for property, shares, valuables)
  • Whether Hold-Over Relief applies
  • Potential stamp duty if recipient assumes a mortgage
  • Inheritance tax implications if you die within 7 years

Sometimes the tax cost of gifting exceeds the inheritance tax saving. Run the numbers first.

Step 7: Update Your Will After Gifting

Lifetime gifts can create unintended imbalances between children. If you gift £100,000 to one child for a house deposit but nothing to your other children, your will should account for this to ensure fair overall distribution.

Consider:

  • Whether lifetime gifts should be deducted from beneficiaries' inheritance shares
  • How to treat gifts made to children who predecease you
  • Whether your will's provisions still make sense after reducing your estate through gifting

Step 8: Seek Professional Advice for Large or Complex Gifts

For gifts exceeding £100,000, gifts of business assets, property transfers, or anything involving trusts, consult a tax adviser or solicitor. The cost of professional advice (typically £500-£2,000) is trivial compared to the tens of thousands you could lose through mistakes.

Worked Example: Emma's 10-Year Strategy

Emma, 60, has an £800,000 estate and wants to reduce inheritance tax while supporting her two children.

Her strategy:

  • Years 1-10: Gift £3,000 annually to each child (£6,000 total per year)
  • Years 1-10: Pay grandson's school fees from surplus pension income (£15,000 per year)
  • Year 5: Gift £50,000 to daughter for house deposit (potentially exempt transfer)

Over 10 years:

  • Annual exemptions: £60,000 (immediately exempt)
  • Surplus income gifts: £150,000 (immediately exempt)
  • Large gift: £50,000 (exempt after 7 years, so exempt by year 12)

Total removed from estate: £260,000, all achieved without compromising Emma's financial security.

Before Gifting Assets Checklist:

  • ✅ I can afford to give this asset away permanently
  • ✅ I've calculated my lifetime financial needs including potential care costs
  • ✅ I've used my annual exemptions for this tax year
  • ✅ I've checked capital gains tax implications
  • ✅ I understand the 7-year rule and accept I must survive 7 years for full exemption
  • ✅ I'm not gifting primarily to avoid care home fees
  • ✅ I've documented this gift with date, value, and recipient
  • ✅ I've considered how this gift affects fairness between my children
  • ✅ I'll update my will to reflect this gift
  • ✅ I've sought professional advice if the gift exceeds £100,000 or involves complex assets

Alternatives to Outright Gifts: Trusts, Loans, and Other Options

Outright gifts offer simplicity but sacrifice control. If you're uncomfortable with permanently giving away assets, several alternatives provide more flexibility while still achieving estate planning goals.

Discretionary Trusts: Retaining Control

A discretionary trust allows you to move assets out of your estate while maintaining control over distributions. You appoint trustees (often including yourself) who have discretion over when and how much beneficiaries receive.

Benefits:

  • You retain influence over asset management
  • Protects assets from beneficiaries' creditors and divorcing spouses
  • Allows flexible distributions based on changing circumstances
  • Can span multiple generations

Drawbacks:

  • Immediate 20% inheritance tax charge on amounts over £325,000
  • Complex setup and administration
  • Ongoing trustee responsibilities and potential accounting costs
  • 10-year anniversary charges and exit charges

Thomas created a discretionary trust for £350,000 for his three grandchildren in 2023. He paid 20% inheritance tax on the £25,000 exceeding the nil-rate band—a £5,000 charge. But Thomas retains control over distributions, ensuring the money funds education and isn't squandered. The trust protects assets from the grandchildren's potential future creditors or divorces.

Bare Trusts for Minors

If you're gifting to children under 18, a bare trust allows you to gift assets that are held in trust until they reach 18 (or 16 in Scotland). The gift leaves your estate immediately, but the children can't access the funds until they're adults.

This provides a middle ground—achieving the inheritance tax benefit of an immediate gift while preventing young children from receiving large sums prematurely.

Interest-Free Loans: Not Gifts

If you want to help your children financially but aren't ready to gift permanently, consider an interest-free loan. As long as it's a genuine loan with clear terms and expectation of repayment, it's not a gift and doesn't trigger inheritance tax.

Critically important:

  • Document the loan formally with a loan agreement
  • Set repayment terms (even if flexible)
  • The loan remains part of your estate until repaid

If you die before the loan is repaid, your estate can call in the debt, meaning your children must repay it or it's deducted from their inheritance.

Rachel lent her daughter £80,000 interest-free for a house deposit in 2022, with a formal loan agreement. When Rachel died in 2024, the £80,000 was still owed and was deducted from her daughter's inheritance share, ensuring fair treatment between Rachel's three children.

Life Insurance Written in Trust

Rather than gifting assets to reduce your estate, consider life insurance written in trust to provide funds to pay inheritance tax bills. The insurance payout doesn't form part of your estate and provides immediate liquidity to cover tax bills without forcing asset sales.

For a £500,000 estate expecting a £70,000 IHT bill, a £70,000 life insurance policy written in trust costs significantly less than gifting £175,000 (which would be required to reduce the estate below the nil-rate band).

Equity Release: Accessing Value Without Gifting

Equity release allows you to access property value while retaining ownership. You receive cash (which reduces your estate if you spend or gift it) while continuing to live in your home.

Drawbacks include interest accumulation reducing inheritance, but it provides liquidity without the finality of gifting.

When to Consider Alternatives:

Choose alternatives to outright gifts when:

  • You're uncertain about your long-term financial needs
  • Your children are young or financially inexperienced
  • You want to protect assets from children's creditors or divorcing spouses
  • You need flexibility to change distributions based on circumstances
  • You want to retain some control while still achieving IHT reduction

When Outright Gifts Are Better:

Stick with simple outright gifts when:

  • You're certain you can afford to give the assets away
  • Your children are financially mature and stable
  • You want simplicity and minimal ongoing administration
  • The assets are straightforward (cash, simple property)
  • Your estate planning needs are uncomplicated

The important principle is this: don't let the tax tail wag the dog. Choose the approach that fits your family's needs, your financial security, and your peace of mind—not just the one with the best tax outcome.

Frequently Asked Questions

Q: How much can I gift to my children tax-free each year?

A: You can gift up to £3,000 per year tax-free under the annual exemption, which can be split among multiple children or given to one person. You can also give unlimited £250 small gifts to different people, as long as you haven't used another allowance for them. If you didn't use your £3,000 allowance last year, you can carry it forward once, allowing up to £6,000 in gifts this year.

Q: What is the 7-year rule for gifting assets?

A: The 7-year rule means that gifts become exempt from inheritance tax if you survive for 7 years after making them. If you die within 7 years, the gift may be subject to inheritance tax at 40% if your estate exceeds £325,000. Taper relief reduces the tax rate on gifts made between 3-7 years before death, from 32% down to 8%.

Q: Can I gift my house to my children and still live in it?

A: If you gift your house to your children but continue living in it rent-free, it's considered a "gift with reservation of benefit" and will remain part of your estate for inheritance tax purposes. To avoid this, you must either move out completely or pay your children market rent to live there. This rule prevents people from giving away assets while still enjoying their benefits.

Q: Do I have to pay capital gains tax when gifting assets to children?

A: Yes, gifting assets to children (except your main home) can trigger capital gains tax based on the asset's increase in value since you acquired it. You're treated as disposing of the asset at market value, even though no money changes hands. However, you may be able to claim Hold-over Relief to defer the CGT liability to your children.

Q: What's the difference between a potentially exempt transfer and an immediately chargeable transfer?

A: A potentially exempt transfer (PET) is a gift to an individual that becomes fully exempt from inheritance tax if you survive 7 years. An immediately chargeable transfer (such as gifts into most trusts) may incur an immediate 20% tax charge if it exceeds your nil-rate band. Most gifts to children are PETs, meaning no tax is due unless you die within 7 years.

Q: Can I gift assets to avoid care home fees?

A: Deliberately gifting assets to avoid care home fees is called "deliberate deprivation of assets" and local authorities can still treat you as owning those assets when assessing your ability to pay. If the council believes you transferred assets specifically to avoid care costs, they can include them in their financial assessment, meaning you may still be required to contribute to care fees.

Q: What happens if I gift more than the annual allowance?

A: Gifts above the £3,000 annual allowance become potentially exempt transfers (PETs). They won't be taxed immediately, but if you die within 7 years, they'll be counted toward your £325,000 inheritance tax threshold. Any amount above this threshold may be taxed at 40%, though taper relief applies for gifts made 3-7 years before death.

Conclusion

Gifting assets to your children offers powerful opportunities to reduce inheritance tax, support your family's financial future, and see your wealth benefit those you love during your lifetime. But the difference between successful gifting and costly mistakes comes down to understanding the rules and planning carefully.

Key takeaways:

  • Start with annual exemptions (£3,000) and small gift allowances (£250) every year—they're immediately exempt with no 7-year wait
  • Understand that larger gifts require you to survive 7 years to become fully exempt from inheritance tax
  • Never gift your home and continue living there rent-free—it's a gift with reservation that fails completely
  • Calculate capital gains tax implications before gifting property or investments
  • Never gift assets primarily to avoid care home fees—local authorities have extensive powers to reverse deliberate deprivation
  • Document all gifts thoroughly with dates, values, and recipients for your executor's records

Helping your children during your lifetime is one of the most meaningful ways to use your wealth. But generosity shouldn't come at the cost of your own financial security or trigger unexpected tax bills that burden your family. With proper planning, you can support your children tax-efficiently while maintaining the lifestyle and security you need.

Creating your will is essential when gifting assets during your lifetime—it ensures your estate plan coordinates with your lifetime gifts and distributes your remaining assets fairly. With WUHLD, it takes just 15 minutes online.

For £99.99 (vs £650+ for a solicitor), you'll get:

  • Your complete, legally binding will
  • A 12-page Testator Guide
  • A Witness Guide
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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.

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