The Smart Parent’s Guide to Gifting Money Tax-Free in the UK

Key Takeaways

 

  • Understand the 7-Year Rule: The foundation of gifting tax rules is that large gifts made within seven years of your death may be subject to Inheritance Tax (IHT). Planning ahead is crucial.
  • Use Your Annual Allowances: Every individual has several tax-free gifting allowances. These include a £3,000 Annual Exemption, a Small Gifts Exemption of £250 per person, and specific allowances for weddings. Using these every year is a simple and effective way to pass on wealth.
  • Leverage Surplus Income: One of the most powerful but underused exemptions is “normal expenditure out of income.” If you can afford to make regular gifts from your post-tax income without affecting your own standard of living, these gifts are immediately exempt from IHT.
  • Keep Meticulous Records: Whether you’re gifting a lump sum for a house deposit in St John’s or helping with monthly bills, keep a clear record of the date, amount, and purpose of every gift. This is invaluable information for the executors of your estate.
  • A Gift is a Gift: Be clear on the terms. If you are giving a gift for a house deposit, a simple “Deed of Gift” can prevent complications with mortgage lenders and HMRC. If it’s a loan, it needs a formal agreement.

There is immense pride in seeing your children make their own way in the world. But in today’s economic climate, milestones that were once attainable can feel out of reach for the younger generation. The average deposit for a first-time buyer in Worcestershire can be a formidable sum, and the cost of living continues to present challenges.

 

It’s no surprise, then, that the “Bank of Mum and Dad” (and Grandparent!) has become a vital financial institution. As an Independent Financial Adviser (IFA) in Worcester, a significant part of my work involves helping parents structure this support in a way that is both generous and smart.

 

The desire to give is simple, but the tax rules surrounding gifts can be complex. Without careful planning, your generosity could lead to a large, unforeseen Inheritance Tax (IHT) bill, diminishing the legacy you hope to leave behind. Let’s open the ledger on the Bank of Mum and Dad and explore how you can be a generous lender while being a savvy financial planner.

The Elephant in the Room: A Primer on Inheritance Tax (IHT)

Before we look at gifting, we need to understand what we’re trying to be efficient about. Inheritance Tax is a tax on the ‘estate’ (your property, money, and possessions) of someone who has passed away.

 

Here are the key thresholds for the 2025/26 tax year:

 

  • Nil-Rate Band (NRB): Everyone has a tax-free allowance of £325,000. If the total value of your estate is below this, no IHT is generally due.
  • Residence Nil-Rate Band (RNRB): You may get an additional £175,000 tax-free allowance if you pass on your main residence to your direct descendants (children or grandchildren).

For a married couple or civil partners, these allowances can be combined, meaning up to £1 million (£325k + £175k, twice over) can potentially be passed on tax-free.

 

So where do gifts come in? Any large gifts you make during your lifetime are still considered part of your estate for seven years. This is the crux of the issue. If you give a substantial gift and pass away within seven years, it could be added back into the value of your estate and become subject to IHT at a rate of 40%.

 

The good news is that there are numerous ways to gift money completely tax-free, outside of this 7-year rule.

The Gifting Rulebook: Your Tax-Free Allowances

Think of these as your annual “freebies” from the taxman. Using them consistently is the foundation of smart estate planning.

 

  1. The Annual Exemption: £3,000 Per Year Every individual can gift away a total of £3,000 each tax year without it ever being a concern for IHT.
  • A couple can therefore gift £6,000 per year.
  • If you don’t use your £3,000 allowance in one tax year, you can carry it forward to the next, but for one year only. This means a couple who didn’t gift last year could potentially give £12,000 in the current tax year.
  1. The Small Gifts Exemption: £250 Per Person You can give as many gifts of up to £250 per person as you want during a tax year, as long as you haven’t used another allowance on that same person. This is perfect for birthday or Christmas presents to multiple children, grandchildren, nieces, and nephews.
  2. Gifts for Weddings or Civil Partnerships This is a specific and very useful allowance. The amount you can give depends on your relationship to the person getting married:
  • Parents: Each parent can give up to £5,000.
  • Grandparents: Each grandparent can give up to £2,500.
  • Anyone else: Can give up to £1,000.

This gift must be made before the wedding, and the wedding must go ahead for the exemption to apply.

 

  1. Normal Expenditure Out of Income This is the most valuable and often overlooked exemption. It allows you to make regular gifts from your surplus income, and these gifts are immediately exempt from IHT – there is no 7-year rule. To qualify, the gifts must meet three strict conditions:
  1. It must be made out of your income (e.g., pension, salary, investment income).
  2. It must be part of a regular pattern of giving (e.g., monthly, quarterly, annually).
  3. After making the gift, you must be left with enough income to maintain your normal standard of living.

This is a fantastic way to help children with ongoing costs like rent, paying off student loans, or contributing to school fees for grandchildren. For example, if your income after tax is £4,000 a month and your bills and lifestyle costs are £3,000, you have £1,000 of surplus income. You could set up a regular payment of, say, £500 to your child, and this would qualify as a tax-free gift from day one.

The Big One: Potentially Exempt Transfers (PETs)

What about gifts that are larger than these allowances, like helping with a deposit for a house in Warndon Villages or Battenhall? Any gift of this nature is known as a Potentially Exempt Transfer (PET).

 

It’s “potentially” exempt because its IHT status depends entirely on you surviving for seven years after making the gift.

 

  • If you live for 7 years: The gift becomes fully exempt and falls outside of your estate.
  • If you die within 7 years: The gift is added back to your estate for IHT calculation purposes.

There is a small mercy called “Taper Relief” if you die between 3 and 7 years after making the gift. This doesn’t reduce the value of the gift itself, but it reduces the amount of tax payable on it, on a sliding scale. Note that the relief is only applicable if the gift is in excess of the nil rate band.

 

Beyond Cash: Gifting a Property Deposit

 

This is the most common reason for a large gift. When doing so, clarity is everything.

 

  • Is it a Gift or a Loan? You must be clear. Mortgage lenders will require the person giving the money to sign a “Deed of Gift” – a formal declaration that the money is an unconditional and non-refundable gift, and you hold no stake in the property.
  • Protecting the Gift: If your child is buying with a partner, you may want to consider protecting your gift. A solicitor can advise on options like a “Declaration of Trust,” which sets out who gets what if the property is sold and the relationship breaks down.

Keeping the Books for the Bank of Mum and Dad

This is not an official bank, but it needs an official bookkeeper: you. It is vital to keep a clear, written record of all gifts you make that are not covered by the minor exemptions. Note down:

 

  • Who you gave the gift to.
  • The amount of the gift.
  • The date you gave it.

This simple logbook will be incredibly valuable to the executors of your will, helping them to accurately calculate and report the value of your estate and any IHT due.

 

One of the most popular and tax-efficient ways to do this is with a Junior ISA (JISA).

 

  • Tax-Free Growth: You can contribute up to a certain limit each tax year (£9,000 for 2025/26), and all the investment growth or interest earned is completely free from tax.
  • Anyone Can Contribute: Once you open the account, grandparents, godparents, and other family members can all contribute. This makes it a perfect gift for birthdays and christenings, channelling that generosity into a meaningful long-term investment.
  • Stocks & Shares vs. Cash: You can choose a Cash JISA or a Stocks & Shares JISA. For an 18-year timeframe, a Stocks & Shares JISA offers the potential for much greater growth, though it does come with investment risk.

Imagine handing your child a lump sum on their 18th birthday that could help fund their university education, go towards a house deposit, or finance a round-the-world trip. That journey starts with planting a small seed today.

A Final Thought: Your Financial Security Comes First

The desire to help your children is a powerful one. But the first rule of the Bank of Mum and Dad is to ensure the bank itself remains solvent. Before making any significant gifts, you must ensure you have enough money to fund your own retirement and potential future needs, such as long-term care. Your financial security must be the priority.

 

Planning allows you to be generous in a way that is sustainable for you and tax-efficient for your family. By understanding the rules and taking advice, you can ensure your legacy truly enriches the lives of your children, just as you intended.

Author:

Andrew Rankin BA (Hons), DipPFS

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Your generosity deserves a strategy. If you are a parent in Worcestershire looking to help your children financially, let’s have a conversation. We can help you build a holistic financial plan that balances your desire to give with the need to secure your own future and minimise Inheritance Tax. Contact us today for a no-obligation consultation.

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Sources and Risk Warnings

 

Sources: The information in this article is based on our understanding of current UK Inheritance Tax legislation and HMRC guidance for the tax year 2025/26. All information is correct as of June 2025.

 

Risk Warnings:

  • This blog post is for informational purposes only and does not constitute financial or tax advice. You should always seek professional advice from a qualified financial adviser and/or a solicitor before making any financial decisions relating to gifting or estate planning.
  • The rules and thresholds for Inheritance Tax are complex and subject to change by the government. The tax treatment depends on your individual circumstances.
  • The value of investments can go down as well as up. If you are considering gifting from your investments, you should be aware that you may get back less than you invested.
  • Estate planning and tax advice are not regulated by the Financial Conduct Authority.