Gifting to Children Inheritance Tax UK: Every Exemption, the 7-Year Rule, and CGT (2026)
Gifts to children can be immediately IHT-exempt (annual exemption £3k, small gifts £250, normal expenditure from income — uncapped) or IHT-free after 7 years (PETs — no monetary limit). CGT must also be considered: gifts of assets trigger a market-value disposal at the parent's CGT rates.
| Exemption / Route | Amount | Carry Forward? | Immediate IHT Exempt? | Notes |
|---|---|---|---|---|
| Annual exemption (s19 IHTA 1984) | £3,000/yr | YES — 1 year (£6,000 in first year if prior year unused) | YES — immediately exempt; not PET | No 7yr clock; combine with s20 and s21 in same year |
| Small gifts (s20 IHTA 1984) | £250/recipient/yr (unlimited recipients) | NO | YES — immediately exempt | Cannot give £3,250 to one child: £3k via s19 + £250 via s20 to same child = not allowed |
| Wedding/civil partnership gifts (s22 IHTA 1984) | £5,000 per child; £2,500 per grandchild; £1,000 others | NO | YES — immediately exempt | Per occasion; gift must be conditional on the marriage/CP proceeding |
| Normal expenditure from income (s21 IHTA 1984) | UNCAPPED | N/A — each year's income used that year | YES — immediately exempt; not PET; no 7yr clock | Most powerful: regular gifts from surplus income exempt immediately; no limit; life insurance premiums in trust |
| PETs to children (s3A IHTA 1984) | UNCAPPED | N/A | NO — 7yr clock; taper relief 3-7yr; fully chargeable if death within 3yr | Taper relief s7(4): year 3-4 = 20% off; 4-5 = 40%; 5-6 = 60%; 6-7 = 80% |
| Charitable gifts (s23 IHTA 1984) | UNCAPPED | N/A | YES — immediately exempt; reduces estate; also qualifies for 36% IHT rate (s36 IHTA if 10%+ of baseline) | Lifetime gifts to charity are PET-exempt; estate gifts reduce the IHT estate |
s19 IHTA 1984: annual exemption £3,000; carry-forward 1yr. s20 IHTA 1984: small gifts £250/person/yr; unlimited recipients; cannot combine with s19 for same person. s22 IHTA 1984: wedding/CP gifts £5k/child; £2.5k/grandchild; £1k/others. s21 IHTA 1984: normal expenditure from income — uncapped; immediate exemption; three conditions. s3A IHTA 1984: PETs — individuals only; 7yr clock; taper s7(4) (3-7yr). s23 IHTA 1984: charitable gifts — unlimited immediate exemption; qualifying UK/HMRC-approved charities. GWR: s102 Finance Act 1986 — retained benefit = stays in estate; POAT FA2004 Sch 15. CGT on gifts: s17 TCGA 1992 — market value disposal to connected persons; no holdover for PETs to individuals; holdover s165 TCGA (qualifying business assets) and s260 TCGA (CLTs). Annual CGT exemption £3,000 (2026/27). Parental settlement rule: ITTOIA 2005 s629 — parent's gift income taxed at parent's rates if >£100/yr per parent for under-18 children. Junior ISA: £9,000/yr; parental settlement rule exempt inside ISA wrapper.
Gifts to Children and IHT: Complete Guide
The 7-year rule for gifts to children — PETs explained
The most common method of gifting to children for IHT purposes is the Potentially Exempt Transfer (PET — s3A IHTA 1984). A PET is any outright gift from one individual to another — typically a parent giving cash, investments, or property to a child. IHT treatment of a PET: the gift is 'potentially' exempt; it becomes fully IHT-exempt if the donor survives 7 years from the date of the gift; if the donor dies within 7 years, the PET becomes a 'failed PET' and is included in the IHT calculation. There is NO monetary limit on PETs — a parent can give any amount to a child as a PET; only the 7-year survival requirement applies. The amount of the failed PET is added to the IHT estate but the NRB is applied first: the NRB (£325,000) is used against the estate in a specific order — gifts are applied from oldest to newest; a failed PET from 6 years ago is netted against the NRB before a more recent gift, and before the remaining estate at death. If the total estate plus failed PETs are still within the NRB, IHT = £0 on the PET. The 7-year period: runs from the date of the gift (bank transfer, cheque cleared, or transfer of asset — not from the date of the donor's intent or promise). The critical date is the precise date the gift became effective.
Taper relief on gifts to children — the 3-7 year window
If a donor dies between 3 and 7 years after making a PET to a child, 'taper relief' (s7(4) IHTA 1984) reduces the IHT payable on the gift. Taper relief only applies to the IHT on the gift ITSELF — not to the overall estate. It does NOT reduce the failed PET's impact on the NRB calculation. Taper relief percentages (applied to the IHT rate on the gift value): 3-4 years: 20% reduction (effective rate 32%); 4-5 years: 40% reduction (effective rate 24%); 5-6 years: 60% reduction (effective rate 16%); 6-7 years: 80% reduction (effective rate 8%). Example: parent gives child £200,000 in 2020; parent dies in 2025 (5 years later): gift is a failed PET; NRB at death = £325,000; NRB already used by other gifts: none; NRB available for this gift: £200,000 fully within NRB → IHT on gift = £0 (no taper relief needed since there's no tax). If the NRB were exhausted: taxable = £200,000; taper relief at 5yr = 40% off; IHT = 40% × £200,000 × (1 − 0.4) = £48,000. Taper relief is most valuable for larger gifts where the NRB is exhausted. For smaller gifts that fall within the NRB, taper relief has no practical effect (because there was no IHT on the gift to begin with).
CGT on gifts to children — the market value trap
IHT is not the only tax to consider when gifting to children — Capital Gains Tax (CGT) must also be assessed: (1) Market value disposal rule (s17 TCGA 1992): a gift to any connected person (including children — s286 TCGA 1992) is treated as a disposal at market value, regardless of the actual consideration. So if a parent gives a buy-to-let property (purchased for £200,000, now worth £400,000) to their child, the parent is treated for CGT as having sold it at £400,000. CGT = 40% × (£400,000 − £200,000 − annual CGT exemption £3,000) = £78,800 (at 24% residential rate from Oct 2024: 24% × £197,000 = £47,280). (2) No holdover relief for PETs to individuals: where a gift to an individual child is a PET (not into a trust), there is NO holdover relief available under s165 or s260 TCGA 1992. The gain must be recognised in the year of the gift. Holdover relief is only available for: CLTs into trusts (s260 TCGA 1992); or gifts of qualifying business assets (s165 TCGA 1992 — sole trader assets, partnership interests, unquoted company shares ≥5% voting). (3) CGT annual exemption: £3,000 per person per year (2026/27). (4) What avoids CGT: main residence (s222 TCGA 1992 — PRR); financial assets (cash, ISA holdings, gilts — no CGT); ISA transfers (but ISA loses its tax-free status if transferred out). The CGT on a gift to a child can sometimes exceed the IHT saving — always calculate both taxes before proceeding.
The gift with reservation trap — what invalidates a gift
A gift to a child must be a genuine transfer where the parent gives up all benefit. If the parent retains any benefit from the gifted asset, the 'gift with reservation' (GWR) rules apply (s102 Finance Act 1986): the property remains in the parent's IHT estate at death-date value, as if it was never given away. Common GWR scenarios with gifts to children: (1) Giving the family home to children but continuing to live there rent-free — GWR applies; the home stays in the estate. Escape: pay open market rent (children pay income tax on rental income). Or: gift the home, genuinely vacate, and start renting elsewhere (not always practical). (2) Giving a holiday home but using it every summer — GWR may apply if the use is significant and not arms'-length. (3) Giving investments but receiving income from them — generally not a GWR (the gift was of the capital; income can flow to the parent if the shares retain the right to dividends? No — actually, if the shares are transferred outright, the income goes to the new owner). (4) Giving money to a child but them spending it on a jointly owned asset — not a GWR (the child received the cash; what they did with it is their choice). POAT (Pre-Owned Asset Tax — Finance Act 2004 Schedule 15): even if a GWR is 'escaped' (e.g. by paying rent), POAT may impose an annual income tax charge on the parent's benefit from living in formerly owned property. POAT affects the donor (as an income tax charge each year) but does NOT cause IHT — a separate charge.
Gifts to minor children — the parental settlement rule
When a parent gives cash or investments to a minor child (under 18, unmarried), the parental settlement rule (ITTOIA 2005 s629) means that investment income generated on the gift is taxed at the PARENT's income tax rates — not the child's — if the income exceeds £100/yr per parent. This anti-avoidance rule prevents parents from shifting income-producing assets to children to exploit the child's lower tax rate or personal allowance. Capital Gains: the parental settlement rule applies to INCOME only; CGT from investments held by the child in their own name is taxable at the CHILD's CGT rates (using the child's annual CGT exemption and lower rate). When the child reaches 18 or marries (under 18): the parental settlement rule stops applying; the child's own income tax rates apply from that point. Planning implications: (1) Cash in a bare trust for a minor child: interest income taxed at parent's rates if >£100/yr per parent — not efficient for income-producing assets while child is under 18; (2) Junior ISA (JISA) — up to £9,000/yr; income and gains within the JISA are free of income tax and CGT regardless of the parental settlement rule (the ISA wrapper provides full tax-free treatment); (3) Pension contributions for a child: up to £2,880/yr (net contribution); HMRC adds 20% relief = £3,600 gross; can be contributed even if the child has no earned income; outside the IHT estate; grows tax-free until retirement. For adults (children over 18): the parental settlement rule does not apply; income from parents' gifts is taxed at the adult child's own rates.
Frequently Asked Questions
How much can I give my children before IHT applies?
Each year you can give: £3,000 under the annual exemption (s19 IHTA 1984) — immediately IHT-exempt; £250 per child under the small gifts exemption (s20 IHTA) — but cannot combine with the annual exemption for the same child; and unlimited amounts from surplus income under the normal expenditure from income exemption (s21 IHTA) — immediately IHT-exempt if habitual, from income, and your standard of living is maintained. In addition, you can give any amount as a PET (s3A IHTA 1984) — IHT-free after 7 years, with taper relief from year 3. The annual exemption carries forward 1 year: if unused last year, you can give £6,000 this year (£3,000 current + £3,000 carried forward).
Do I pay CGT when I give money or assets to my children?
Cash gifts: no CGT — cash is not a chargeable asset. Investment assets (shares, property): yes — gifts to connected persons (including children) are treated as disposals at market value under s17 TCGA 1992. CGT is calculated on the gain (market value minus original cost) using the parent's annual CGT exemption (£3,000/yr 2026/27) and applicable rates (24% for residential property; 18%/24% for other assets above/below basic rate). There is no holdover relief for PETs to individuals. For qualifying business assets (sole trader/partnership assets, unquoted company shares ≥5% voting), holdover relief is available under s165 TCGA 1992 — deferring the CGT to the child's disposal. No CGT on main residence transfers (PRR — s222 TCGA 1992 for the donor's only/main residence).
What is the 7-year rule for gifts to children?
The 7-year rule (s3A IHTA 1984) applies to PETs (Potentially Exempt Transfers) — outright gifts from one individual to another. A PET becomes fully IHT-exempt if the donor survives 7 years from the date of the gift. If the donor dies within 7 years: the PET is a 'failed PET' and is included in the IHT calculation. Taper relief (s7(4) IHTA 1984) reduces the IHT on a failed PET if death occurs between 3-7 years: years 3-4 = 20% off; 4-5 = 40%; 5-6 = 60%; 6-7 = 80%. The NRB (£325,000) is applied first: failed PETs only create an IHT charge if the combined estate + failed PETs exceed the NRB. There is no monetary limit on PETs — a parent can give any amount (£50,000, £500,000, or more) as a PET with no immediate IHT charge.
Can I give my house to my children to avoid inheritance tax?
Only if you genuinely move out and stop benefiting from the home. If you give your home to your children but continue to live there rent-free, the gift with reservation rules (s102 Finance Act 1986) apply: the home stays in your IHT estate at its death-date value. To escape the GWR: you must either pay full open market rent to your children (rent is their income; taxable); or genuinely vacate and not return to live there without paying rent. A further trap: POAT (Pre-Owned Asset Tax — Finance Act 2004 Schedule 15) imposes an annual income tax charge if you occupy formerly owned property. Alternative strategies: equity release (retain occupation; reduce estate with the loan); tenants-in-common with IPDI trust (s49A IHTA 1984) in your will — keeps you in the property during life while securing the home for children on death.
What happens if I give money to my children and then die within 7 years?
The gift becomes a 'failed PET' and is added back to the IHT estate for calculation purposes. The NRB (£325,000) is applied against the failed PETs first (oldest gifts first) and then against the death estate. If the failed PET is within the NRB: no IHT on the gift. If the combined estate + failed PETs exceed the NRB: IHT at 40% on the excess, subject to taper relief if death was 3-7 years after the gift. Who pays: the recipient (the child) is primarily liable for IHT on the failed PET; if the estate is insufficient, HMRC can pursue the recipient. This is why large PETs should be documented carefully and life insurance (written in trust — immediately IHT-exempt under s21 IHTA if premiums from income) can be arranged to cover the IHT risk during the 7-year window.
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