3 crucial steps to take before gifting money to your children

Gifting assets to your children during your lifetime allows you to see the difference your wealth can make to their lives first-hand.

There are financial benefits too, as gifting portions of your wealth reduces the value of your estate and its subsequent Inheritance Tax (IHT) liability at the time of your death.

While lifetime gifting has long been a popular estate planning strategy, planned rule changes regarding pensions and IHT have led to more gifts than ever. A 2026 report in Today’s Wills and Probate found that annual financial gifts have reached £17 billion.

Read more: Your pension could be subject to Inheritance Tax next year. Here’s how to prepare

So, with lifetime gifting becoming increasingly common, read on to discover three crucial steps to take before you use this strategy.

1. Determine whether gifting is necessary by calculating your estate’s Inheritance Tax exposure

Every estate has a certain tax-free threshold, though the exact amount depends on your circumstances and planning.

Your tax-free threshold is determined by the nil-rate bands. In the 2026/27 tax year, they are:

• The standard nil-rate band: £325,000 (applies for everyone)
• The residence nil-rate band: £175,000 (applies only to those passing on their main homes to a direct descendant, and tapers on estates valued over £2 million)
• Spousal exemption – Your estate is exempt from IHT if it passes to your spouse or civil partner. They can also inherit your unused nil-rate bands.

The nil-rate bands allow your individual estate to benefit from a maximum of £500,000 in IHT relief. When combined with your partner, you can potentially pass on up to £1 million free from IHT.

Despite this, the changes to pensions and IHT could mean that a significantly larger portion of your estate is exposed. So, you might also want to take advantage of other IHT rules that can reduce your overall liability, including:

• Donating part of your estate to charity – If you leave 10% of your estate’s baseline amount to charity, the rest benefits from a reduced rate of IHT (36% instead of 40%).
• Agricultural Relief (AR) and Business Relief (BR) – Qualifying business and agricultural assets can receive up to 100% IHT relief up to the value of £2.5 million per individual. Above this threshold, assets eligible for full AR or BR will receive 50% relief instead. Spouses and civil partners can also combine their allowances, meaning your estate could benefit from up to £5 million AR and BR relief, with careful planning.

Once you understand what reliefs you qualify for, you can accurately calculate how much of your estate remains above the threshold and in the “taxable range” – the portion of your wealth that will be liable for an IHT charge.

If the total value of your estate falls below your relief thresholds, gifting would offer no meaningful tax benefits.

If the total value of your estate lands above your threshold line, then you can reduce the amount of wealth that exceeds the nil-rate bands, or push your estate below the threshold altogether, using the right lifetime gifting strategy.

2. Understand how gifting allowances work

Lifetime gifting is a long-term strategy. Each year, you can give gifts up to the annual gifting exemption without it later attracting IHT. In 2026/27, the exemption is £3,000. You can also carry forward any unused exemption by one year, and couples can combine their allowances.

Alongside this, there are other gifting exemptions, including:

• Small gift allowance – You can gift up to £250 a year per person, provided it doesn’t form part of a larger gift.
• Wedding gift allowance – For weddings, you can gift £5,000 to your child, £2,500 to your grandchild or great-grandchild, and £1,000 to anyone else.
• Gifts from regular income – You can make unlimited regular payments provided they don’t impact your normal standard of living. This is particularly relevant for pensions, as you can gift some of your pension income to your loved ones to help pass it on efficiently, but only if it doesn’t adversely affect your life.

Using these allowances, you can gradually reduce the value of your estate year on year and limit its future IHT exposure.

Any gifts made outside of your gifting allowances are known as potentially exempt transfers (PETs) and may be liable for IHT if you die within a certain time frame after making them.

If you survive seven years after making the gift, then the full amount is exempt from IHT. If not, then IHT is charged based on how much time has elapsed since giving the gift.

A financial adviser can help you build a gifting strategy that makes full use of your allowances and ensures your assets are passed on as efficiently as possible.

3. Think about whether your child is emotionally prepared to receive your wealth

When it comes to lifetime gifting, the issues aren’t always financial.

If your child isn’t emotionally prepared to receive your wealth, there may be doubts about whether they will use the gift sensibly and effectively.

However, certain forms of gifting can be managed more closely than others. For instance, you could explore:

• Putting assets into a trust – A trust is managed by a board of trustees of your choosing, who have direct control over your assets and regulate how money is spent.
• Paying into their pension – This can help build their long-term security, though the money may not be accessible for some time.
• Junior ISAs (JISAs) – JISAs can be a very effective way of helping children under 18 build wealth. The interest and returns are tax-free, and the child can access the money once they turn 18.

You may also want to involve your children early in the inheritance process. For instance, you could:

• Bring them to adviser meetings
• Explain the tax benefits of lifetime gifting and how it rewards them
• Teach them how to use the money sensibly, like for a house deposit, paying off student debt, or investing for long-term wealth.

These steps can help them understand the implications of the gift and the most effective and efficient ways of managing it.

Get in touch

Discuss your lifetime gifting options with your Caliber financial adviser today. We can fit you with a bespoke IHT-mitigation strategy that helps you leave more behind for those you love.

Email contact@caliberfm.co.uk or call 01525 375286 to speak to one of our team today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

The Financial Conduct Authority does not regulate estate planning or tax planning.