IHT and Grandchildren UK: Inheritance Tax When Leaving Money or Property to Grandchildren (2026)
Grandchildren are direct descendants for the £175,000 Residence Nil Rate Band. Lifetime gifts to grandchildren are PETs (7-year clock). Wills can leave assets directly to grandchildren — skipping a generation and avoiding a second IHT charge in the children's estate.
IHT Rules for Grandchildren
Grandchildren as direct descendants: RNRB eligibility
The Residence Nil Rate Band (RNRB) — worth up to £175,000 per person — applies when the deceased's main residential property is 'closely inherited' by a direct descendant. HMRC defines 'direct descendants' to include: children, grandchildren, great-grandchildren, and their respective spouses or civil partners. Step-grandchildren and adopted grandchildren are also included. This means that leaving the family home directly to grandchildren (rather than to children) can still preserve the RNRB — provided the grandparent's estate does not exceed £2,000,000 (above which the RNRB tapers away). If a will skips the children's generation and leaves the estate directly to grandchildren, the RNRB is still available. The RNRB is not available where property is left to a discretionary trust (even if grandchildren are potential beneficiaries) — it requires a direct or qualifying interest in possession gift to a direct descendant.
Lifetime gifts to grandchildren: PETs and the 7-year clock
A gift from a grandparent to an adult grandchild (aged 18 or over) is a Potentially Exempt Transfer (PET) under s3A IHTA 1984. The gift is immediately exempt if the grandparent survives 7 years from the date of the gift. If the grandparent dies within 7 years, the gift fails and may add to the chargeable estate — subject to taper relief at 3–7 years. The annual exemption (£3,000 per donor per year) can be used for any donee — grandchildren included. Small gifts of up to £250 per recipient per year are also exempt (s20 IHTA 1984), as are gifts for the marriage or civil partnership of a grandchild (up to £2,500 per grandparent). For grandchildren under 18, a gift to the grandchild's parent to hold as bare trustee is common — the parent holds the assets on the grandchild's behalf until 18. This is still a PET for the grandparent (the gift is made on the date of transfer, not when the grandchild turns 18).
Gifts to grandchildren under 18: parental settlement trap
If a grandparent makes a gift to a grandchild under 18 whose parent still has parental responsibility, there is no 'parental settlement' problem (unlike gifts from parents to their own minor children). A grandparent's gift to a grandchild (whether held by the child directly, by the parent as bare trustee, or by a designated account) does not trigger the income tax parental settlement rules under ITTOIA 2005 s629. This makes grandparent-to-grandchild gifting more tax-efficient than parent-to-child gifting for minor children: the income and gains in a child's account or trust funded by grandparents are taxed on the child (at the child's personal allowance and rates), not on the grandparent. This makes education savings plans funded by grandparents — junior ISAs, designated accounts, bare trust investment accounts — efficient for both IHT and income tax purposes.
Trusts for grandchildren: age 18-25 trusts and bereaved minor trusts
An age 18-25 trust (s71D IHTA 1984) is designed for bereaved children or grandchildren: the beneficiary must become absolutely entitled to the trust assets between ages 18 and 25. These trusts are commonly used in wills for grandchildren: the grandparent leaves assets into trust, with the grandchild taking the fund outright at a specified age (e.g. 21 or 25). IHT treatment of age 18-25 trusts: entry — charged if assets above the available NRB (as a CLT, not PET, if funded during lifetime); no periodic 10-year charge (unlike a standard discretionary trust); exit charge applies when assets leave the trust between ages 18 and 25, based on the proportion of the maximum charge period elapsed. Bereaved minor trusts (s71A IHTA 1984) are more IHT-efficient (no exit charge at all) but are only available where the deceased is the minor's parent — grandparents cannot use this structure. So grandparents typically use age 18-25 trusts (some IHT exit charge applies) or absolute gifts to grandchildren directly.
Leaving the estate directly to grandchildren: will structure
A grandparent may wish to leave their estate (or part of it) directly to grandchildren in the will — skipping the children's generation. This is possible and is a legitimate IHT planning strategy: (1) the assets pass out of the grandparent's estate on death; (2) the assets go directly to the grandchildren, not to the children first (avoiding the assets being taxed again in the children's estate on their deaths); (3) the RNRB is still available if the home passes to grandchildren as direct descendants. This 'generation-skipping' approach is most effective where the children are already wealthy and have significant IHT exposure of their own — passing assets through the children would add to the children's taxable estate. Where the children have financial need, this approach may not be suitable — a life interest trust for the children (with remainder to grandchildren) is an alternative that benefits both generations while keeping assets outside the children's estate for IHT.
IHT on inheritance received by grandchildren: their position
When a grandchild receives an inheritance under a will or intestacy, the grandchild does not pay IHT personally — IHT is a charge on the estate, paid by the executors before the net estate is distributed. The grandchild receives their share net of all IHT already paid. Where a grandchild receives assets from a trust (e.g. on a trust distribution or at age 25), an IHT exit charge may apply — this is paid by the trustees from trust funds, not by the grandchild personally. If a grandchild disclaims their inheritance (refuses to accept it), the assets may fall into residue or pass to other beneficiaries under the will — a disclaimer can be used if accepting the inheritance would increase the grandchild's own IHT estate. A deed of variation can redirect an inheritance received by a grandchild to a different beneficiary within 2 years of death — with IHT and CGT treating the variation as if the deceased had made the redirection directly.
Frequently Asked Questions
Do grandchildren qualify for the RNRB (Residence Nil Rate Band)?
Yes. Grandchildren are 'direct descendants' for RNRB purposes. If a grandparent leaves their main residential property to their grandchildren under the will (or via a qualifying interest in possession trust for the grandchild), the RNRB of £175,000 per grandparent is available — provided the estate is below £2,000,000. This means a grandparent can use the RNRB to shelter the home from IHT when leaving it directly to grandchildren, just as they could when leaving it to children.
Is a gift from grandparent to grandchild subject to IHT?
A lifetime gift from a grandparent to an adult grandchild (18 or over) is a PET (potentially exempt transfer). It is immediately exempt if the grandparent survives 7 years. If the grandparent dies within 7 years, the gift may add to the chargeable estate — subject to taper relief from year 3. The annual exemption (£3,000/year) is also available for grandchild gifts. For grandchildren getting married, a grandparent can give up to £2,500 exempt from IHT as a marriage gift.
What happens to IHT if I skip a generation and leave everything to grandchildren?
Leaving your estate directly to grandchildren (bypassing your children) is a legitimate 'generation-skipping' strategy. The assets pass out of your estate on death (no 'second bite' IHT in your children's estate). The RNRB is still available if the home passes to grandchildren. The grandchildren receive the assets net of IHT. Your children receive nothing under your will — so this is only appropriate where the children do not have financial need, or where a separate provision is made for them.
Can I set up a trust in my will for grandchildren?
Yes. An age 18-25 trust (s71D IHTA 1984) is the standard trust structure for grandchildren in wills — the grandchild becomes absolutely entitled between ages 18 and 25. These trusts have no periodic 10-year IHT charge but do carry an exit charge when assets leave the trust between 18 and 25. A bereaved minor trust (s71A IHTA 1984) is more IHT-efficient (no exit charge) but is only available where the deceased was the child's parent — not available for grandparent wills. Alternatively, a bare trust (with the grandchild becoming entitled at 18) has no IHT trust charges at all.
Do grandchildren pay tax on money inherited from grandparents?
Grandchildren do not pay inheritance tax on money they inherit — IHT is paid by the executors from the estate before assets are distributed. The grandchild receives their share net of IHT. Capital gains tax does not arise on the inheritance itself (the grandchild takes the asset at its death value, with a fresh CGT base cost). If the inherited assets then produce income (rent, interest, dividends), the grandchild is taxed on that income in the usual way. If assets are held in trust, any IHT exit charge is paid by the trustees, not the grandchild personally.
Include Grandchildren Correctly in Your Will
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