Pass Wealth to Children Tax-Efficiently

Reviewed by Neil AinsworthLast updated: March 24, 2026 4:59 pm

a child sitting on a table playing with toys

In this article:

Understanding Your Tax Liabilities
Utilise Your Gift Allowances
Setting Up Trusts
Invest in Pensions
Life Insurance Policies

Passing on wealth to the next generation is an important part of many families’ financial planning. UK tax rules can be complex and may reduce what your beneficiaries ultimately receive. This guide outlines common options and key rules to help you make informed decisions. It is educational in nature and not personal advice.

Understanding Your Tax Liabilities

Understanding the rules of Inheritance Tax¹ (IHT) is essential for effective estate planning. As at the 2026/27 tax year, the IHT nil-rate band² remains £325,000. The value of your estate above this is normally taxed at 40% (reduced to 36% where at least 10% of the net estate is left to charity). Any unused nil-rate band can usually be transferred to a surviving spouse or civil partner, potentially increasing the combined allowance to £650,000.

Additional Considerations for Larger Estates

Where a main residence is left to direct descendants, the residence nil-rate band (RNRB) may also apply. This is £175,000 per person in 2026/27, taking a single person’s combined IHT threshold up to £500,000. Any unused RNRB can usually be transferred to a surviving spouse or civil partner, meaning some couples can pass up to £1 million free of IHT. The RNRB tapers away for estates valued over £2 million (£1 reduction for every £2 over the threshold), and there are special “downsizing” rules where a former main residence has been sold.

Interactions with Other Taxes

While planning for IHT, it’s also important to consider other taxes. Capital Gains Tax³ (CGT) is not charged on death: most assets are rebased to their market value at the date of death for the beneficiary. CGT may arise if the beneficiary later disposes of the asset at a gain. By contrast, lifetime gifts of assets can trigger CGT at the time of the gift unless a relief applies.

Periodic Review and Adjustments

Because key thresholds have been frozen in recent years, inflation can erode their real value and bring more estates into IHT. Review your plans regularly, ideally with a regulated professional, so they remain aligned with tax rules and your circumstances.

By understanding how today’s tax rules affect your estate, you can take informed steps to safeguard and maximise the wealth you wish to pass on to your children.

Utilise Your Gift Allowances

One of the simplest ways to reduce the value of your estate for IHT is to make gifts. UK rules provide several useful exemptions:

Annual exemption: Each person can give up to £3,000 in total each tax year without it being included in their estate for IHT. If unused, you can carry it forward only one tax year.
Small gifts: You can make any number of gifts of up to £250 per person each tax year, provided you do not use another exemption for the same recipient in that year.
Wedding or civil partnership gifts: Parents can give up to £5,000 to their child, grandparents up to £2,500, and others up to £1,000, free of IHT if given on or before the ceremony.
Regular gifts from surplus income: Gifts that form a pattern of normal expenditure, are made from your post-tax income, and do not affect your usual standard of living are exempt from IHT. Keep clear records to evidence this.

Used consistently, these exemptions can reduce the taxable value of your estate over time and let you see loved ones benefit during your lifetime.

Strategic Application of Gift Allowances

Planning how and when to use exemptions can increase their impact. Starting earlier allows you to claim more years of the £3,000 annual exemption, and combining it with the small-gifts exemption can help support a wider circle of family and friends without affecting your lifestyle.

Record Keeping and Timing

Keep meticulous records of what you give, to whom, and when. Most outright gifts to individuals are “potentially exempt transfers” (PETs) and fall outside your estate if you survive seven years. If you die within seven years, taper relief may reduce the IHT on gifts made more than three years before death. Gifts into most trusts are “chargeable lifetime transfers” and may trigger IHT at the time of the gift. If you give something away but continue to benefit from it (for example, giving away your home but living there rent-free), the gift may be treated as still being in your estate for IHT purposes.

Used sensibly, gifting can be a valuable part of estate planning. Review your approach regularly, and consider professional advice to ensure it remains appropriate as rules and personal circumstances change.

Setting Up Trusts

Trusts can help you control how and when assets are used, and in some cases can improve tax outcomes. Choosing the right structure for your aims and family circumstances is essential, as trusts are not a one-size-fits-all solution.

Discretionary trusts: These give the trustees power to decide how and when to distribute funds among a class of beneficiaries. They can suit situations where beneficiaries’ needs may change or are uncertain.
Bare trusts: Assets are held by trustees but belong absolutely to the named beneficiary, who can usually demand them at age 18 in England and Wales (16 in Scotland). Bare trusts are valued for simplicity and clarity.

Depending on your objectives, other forms may be appropriate:

Interest in possession trusts: One or more beneficiaries have a right to the income (or use) of trust assets, typically for life, with capital passing to other beneficiaries later. This can support a spouse or partner while preserving capital for children.

Trusts can provide structure, protect vulnerable beneficiaries, and help ring-fence assets. They can also be set to provide income where appropriate. However, trusts come with ongoing duties and costs.

Key Considerations When Setting Up a Trust

When establishing a trust, several important considerations must be taken into account:

Selection of trustees: Trustees manage the assets and must act in the beneficiaries’ best interests. Choose reliable, competent people and consider appointing a professional where appropriate.
Legal and tax implications: Different trusts are taxed differently. For example, gifts into many discretionary trusts are chargeable lifetime transfers and may incur a 20% entry charge on amounts above the available nil-rate band, with potential 10-yearly (periodic) and exit charges of up to 6%. Registration on HMRC’s Trust Registration Service⁴ is often required. Take specialist advice.
Trust documentation: Clear, precise trust deeds and records help avoid disputes and ensure legal compliance.

Used appropriately, trusts can help you pass wealth to children in a controlled and potentially tax-efficient way. Regular reviews with a solicitor or financial planner experienced in trusts and estate planning can keep arrangements fit for purpose as laws and family needs evolve.

Invest in Pensions

Pensions can be an effective way to provide for your own retirement and to pass on wealth. If the pension holder dies before age 75, death benefits are generally tax-free for beneficiaries, subject to current allowances and provider time limits. Where death occurs at or after 75, withdrawals by beneficiaries are taxed at their marginal income tax rates.

Contributing to a child’s pension can be a tax-efficient gift. In 2026/27, up to £2,880 a year can be paid for a child with no earnings. Basic-rate tax relief is then added at source, taking the total gross contribution to £3,600. The money is locked away until at least the normal minimum pension age⁵ (scheduled to rise to 57 from April 2028).

Benefits of Early Pension Contributions

Starting early gives contributions more time to grow through compound returns. Regular payments of £2,880 net (£3,600 gross) from birth to age 18 could build meaningfully over the long term, though outcomes depend on investment performance and charges, and values can go down as well as up.

Choosing the Right Pension Scheme

Stakeholder pensions: These have a statutory cap on charges and low minimum contributions, making them a simple, low-maintenance option.
Self-Invested Personal Pensions (SIPPs): Offer wider investment choice and control, but can carry higher costs and greater investment risk. Suitable only if you are comfortable selecting and monitoring investments.

Considerations for Pension Contributions

When planning contributions, consider future tax positions and affordability. Balance pension saving with other goals, and take advice if unsure.

Contributing to a pension is a long-term commitment and can be a helpful part of estate planning. Review contributions regularly, in light of changing rules and family circumstances, to maximise benefits.

Life Insurance Policies

Placing a life insurance policy in trust can keep the payout outside your estate for IHT purposes and help it reach beneficiaries more quickly without probate. Life insurance proceeds are usually free of Income Tax and Capital Gains Tax; IHT should not apply if the policy is correctly written in trust.

A Financial Adviser Can Help

With numerous options and complex rules, regulated advice can help you build a plan that fits your objectives, tax position and risk tolerance. An adviser can explain how allowances work, whether a trust is appropriate, and how pensions and insurance interact with IHT.

FinancialAdvisers.co.uk can connect you with FCA-authorised financial advisers in your area who specialise in estate and inheritance planning. This article is for information only and is not a recommendation or personal advice; consider seeking regulated advice before taking action.

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