Generation Skipping and IHT: Passing Wealth Directly to Grandchildren

Direct legacy to grandchildren in the will

How it works: A will that leaves specific assets (or a share of the residue) directly to grandchildren bypasses the children's estates entirely. IHT is paid once, on the grandparent's death. The assets then pass to grandchildren free of any further IHT charge. If the family home is left directly to grandchildren (who are 'direct descendants' under the RNRB rules), the Residence Nil-Rate Band (£175,000 per person in 2026/27) is available — potentially saving up to £70,000 in IHT compared with leaving the home to the children in a form that does not qualify.

Consideration: The children lose the asset entirely — they cannot benefit from it during their lifetime. Where the children are financially dependent on their inheritance, bypassing them may cause hardship. A hybrid approach — leaving some assets to children and skipping others to grandchildren — is often the practical solution.

Lifetime gifts to grandchildren (PETs)

How it works: A grandparent can make an outright gift to an adult grandchild at any time. The gift is a potentially exempt transfer (PET) — no IHT arises immediately. If the grandparent survives 7 years, the gift is permanently outside the estate. The grandchild receives the asset without it ever passing through the child's estate. Small gifts (£250 per person) and the £3,000 annual exemption are fully IHT-free from day one.

Consideration: The gift is permanent and irrevocable. The grandparent loses control of the asset. If the grandchild is a minor, a bare trust is used to hold the asset until they turn 18 — when they then have an unconditional right to it. Equity release or retaining income-producing assets may be needed if the grandparent depends on the gifted assets for income.

Trusts for grandchildren (bare trust or age 18-to-25 trust)

How it works: A bare trust allows a grandparent to make a gift (PET) to a minor grandchild with trustees holding the assets until age 18. An age 18-to-25 trust (s71D IHTA 1984) allows the grandchild to access capital between 18 and 25, with a limited exit charge (up to 4.2%). Both structures allow the asset to skip the child's estate — the gift goes directly from grandparent to grandchild. Discretionary trusts for grandchildren are relevant property trusts and incur the 10-year periodic charge and exit charges (less efficient for generation skipping).

Consideration: Bare trusts require the grandchild to receive the assets unconditionally at 18. For a grandparent who is uncertain whether all grandchildren will be financially responsible at that age, an age 18-to-25 trust or a discretionary trust (accepting the relevant property charges) provides more control.

Nil-rate band legacy to grandchildren

How it works: A will can include a specific legacy of an amount equal to the nil-rate band (£325,000) to grandchildren — with the balance of the estate passing to the children. This ensures the NRB is used on the grandparent's death to pass assets to grandchildren IHT-free, while the remaining estate (passed to children, potentially with the spousal exemption or a trust) uses the children's NRBs on their later deaths.

Consideration: If the grandparent's estate is entirely within the NRB (under £325,000 individually, or with other reliefs), there may be no IHT saving from generation skipping. The strategy is most effective where the estate is above the combined NRB and RNRB thresholds and where the children's estates are also expected to be taxable on their own deaths.

What is generation skipping for IHT purposes?

Generation skipping in UK IHT planning refers to structuring lifetime gifts and wills so that assets pass directly from a grandparent (or more senior generation) to grandchildren — bypassing the children's generation entirely. The IHT benefit: the assets are taxed once (on the grandparent's death or after 7 years from a lifetime gift), rather than twice (on the grandparent's death and again on the children's death). In a traditional cascade — grandparent → child → grandchild — the same assets can be subject to 40% IHT twice: once when the child inherits and again when the grandchild inherits. Generation skipping eliminates the second charge. The cost: the children lose access to the assets and any income they produce during their lifetimes.

Does generation skipping affect the Residence Nil-Rate Band?

Yes — and this is one of its key advantages. The Residence Nil-Rate Band (RNRB, £175,000 per person in 2026/27) applies where a qualifying residential property is left to 'direct descendants' — which includes children, grandchildren, great-grandchildren, stepchildren, and their issue. If a grandparent's will leaves the family home directly to grandchildren, the RNRB is available. The RNRB is not available if the home is left to a discretionary trust (where no individual has a direct qualifying interest), or to children who then hold it in trust for grandchildren without a qualifying interest. Leaving the family home directly to grandchildren in a will is therefore one of the most straightforward ways to use the RNRB while simultaneously achieving generation skipping.

Can generation skipping trigger any anti-avoidance rules?

In the UK, there is no specific 'generation skipping tax' equivalent to the US federal GST — generation skipping via direct gifts and will legacies is entirely legitimate UK IHT planning. The normal anti-avoidance rules that apply to all IHT transactions apply equally to generation-skipping structures: (1) Gifts with reservation of benefit (FA 1986 s102): if the grandparent gives an asset to a grandchild but continues to benefit from it (e.g. lives in a gifted house), the asset remains in the grandparent's estate for IHT. (2) Associated operations (s268 IHTA 1984): HMRC can aggregate a series of steps designed to achieve an IHT benefit. (3) The relevant property regime: where assets are put into discretionary trust for grandchildren, the normal relevant property charges apply. Straightforward outright gifts or legacies — without retained benefit or complex structuring — do not attract anti-avoidance challenge.

What are the non-IHT consequences of generation skipping?

The main non-IHT considerations are: (1) Capital Gains Tax: assets gifted during the grandparent's lifetime trigger a CGT disposal at market value (holdover relief may be available into a trust, but not on outright gifts to grandchildren unless the asset is a business asset). On death, assets pass at probate value — CGT is 'wiped' — so there is no CGT cost to generation skipping via the will. (2) Family fairness: bypassing the children's generation may create family tension, particularly where the children expected to inherit. If the children are financially dependent on the inheritance, this can cause hardship. (3) Dependants: under the Inheritance (Provision for Family and Dependants) Act 1975, adult children who were financially dependent on the grandparent can apply for reasonable financial provision from the estate even if not named in the will. Completely disinheriting financially dependent children (even in favour of grandchildren) carries a legal risk of court challenge.

Is generation skipping suitable for all estates?

Generation skipping is most beneficial where: (1) the grandparent's estate is above the IHT threshold (combined NRB and RNRB of up to £1m for a married couple with a qualifying property); (2) the children's estates are also likely to be above threshold on their own deaths — so skipping prevents a second IHT hit on the same assets; (3) the children are financially independent and do not need the inheritance for their own living needs; (4) the grandchildren are old enough (or a trust structure is in place) to receive assets responsibly. For smaller estates (below the combined NRB and RNRB thresholds), generation skipping produces no IHT saving — the assets would pass IHT-free to the children in any event. For estates where the children are themselves elderly and also likely to die soon, generation skipping may save two rounds of IHT in quick succession.