IHT Planning for Grandchildren UK: How to Pass Wealth to the Next Generation Tax-Efficiently (2026)
Passing wealth directly to grandchildren (generation-skipping) avoids the double IHT that arises when children inherit and then die with large estates. Grandchildren are 'direct descendants' for the RNRB — the home passes to them and still claims the full allowance. Bare trusts for grandchildren carry no periodic or exit charges and are one of the most efficient IHT planning tools available.
| Planning Tool | IHT-Free? | 7-Year Rule? | Periodic/Exit Charge? | Key Point |
|---|---|---|---|---|
| Direct gift to grandchild (PET) | After 7yr | Yes | No | Same 7yr rule as gifts to children |
| Annual exemption to grandchildren (s19 IHTA) | Immediately | No | No | £3,000/yr total (all recipients combined) |
| Small gifts to grandchildren (s20 IHTA) | Immediately | No | No | £250 per grandchild, unlimited grandchildren |
| Wedding gifts to grandchildren (s22 IHTA) | Immediately | No | No | £2,500 per grandchild on their marriage |
| Normal expenditure from income (s21 IHTA) | Immediately | No | No | Uncapped; from surplus income; regular gifts |
| Bare trust for grandchild | After 7yr (PET on creation) | Yes | No | Grandchild owns beneficially; access at 18; parental settlement rule N/A for grandparents |
| Discretionary trust for grandchildren (CLT) | No — CLT entry charge | 7yr recalculation on death | Yes — periodic/exit charges | Flexibility; but relevant property regime applies |
| Family home to grandchildren in will (RNRB) | RNRB up to £175k | No — on death | No | Grandchildren are lineal descendants; RNRB applies |
2026/27. NRB: £325,000. RNRB: £175,000. Annual exemption: £3,000/yr. Small gifts: £250/recipient. s71D 18-25 trust: only for beneficiaries whose parent died (not grandparent); grandparent's will cannot create s71D trust. Discretionary trust: relevant property regime (s58 IHTA); periodic charge s64 up to 6% per 10yr; exit charge s65.
IHT Planning for Grandchildren: Complete Guide
Why planning for grandchildren saves more IHT than planning for children
Passing wealth directly to grandchildren (generation-skipping) can be more IHT-efficient than passing it to children first. When wealth passes to children, it forms part of their estate — and is taxed at 40% again when the children die (unless exempted). By skipping a generation, wealth passes to grandchildren free of this second layer of IHT. Example: grandparent gives £325,000 to a child. If the child's estate is large, 40% IHT applies on the child's death on the £325,000 (above any available threshold) = £130,000 lost to IHT again. Alternative: grandparent gives £325,000 directly to grandchild. The grandchild has their own NRB — if they hold the money within their threshold, no further IHT arises for decades. The generation-skip is most valuable where: (a) the children's estates are already above the IHT threshold and further inheritances will just increase IHT; (b) the grandchildren have small or no estates and the gift does not push them over the NRB. In these cases, bypassing the children's estate via direct gifts or bare trusts for grandchildren is significantly more tax-efficient.
Direct lifetime gifts to grandchildren — PETs and the 7-year rule
A gift of cash or assets directly to a grandchild (an individual) is a Potentially Exempt Transfer (PET — s3A IHTA 1984). The same rules apply as for gifts to children: (1) IHT-free after 7 years from the date of the gift; (2) Failed PET (if grandparent dies within 7 years): the value of the gift at the date of the gift is included in the IHT estate; taper relief reduces the IHT in years 3-7; (3) The gift must be genuine: the grandparent must give away the asset with no retained benefit; (4) Amount: there is no limit on the amount of PETs that can be made — the 7-year rule applies to the full amount; (5) CGT on non-cash gifts: if appreciated assets (shares, property) are given to a grandchild, CGT may arise on the gain (a gift of shares is a disposal at market value — s17 TCGA 1992). The annual exemption (£3,000/yr — s19 IHTA) and small gifts exemption (£250 per grandchild — s20 IHTA) are immediately exempt from IHT with no 7-year clock. These are particularly useful for smaller regular gifts.
Bare trusts for grandchildren — no periodic charges and grandchild's NRB applies
A bare trust for a grandchild is one of the most IHT-efficient structures for grandparent wealth planning: (1) The gift of assets into a bare trust is a PET — IHT-free after 7 years from the date of the gift; (2) There are no periodic charges (10-year anniversary charges) or exit charges — bare trusts are not within the relevant property regime; (3) The assets in the bare trust are treated as owned by the grandchild for IHT purposes — they form part of the grandchild's estate (using the grandchild's NRB, not the grandparent's); (4) The trustees hold and manage the assets until the grandchild reaches 18 (or any age if specified — but they can demand the assets from 18); (5) Income: if the grandchild's income from the trust assets exceeds £100/year and the settlor is a parent, the income is treated as the parent's for income tax. For grandparent-settled trusts, this parental settlement rule does NOT apply — income is taxed as the grandchild's own income (at the grandchild's lower rates). This makes bare trusts particularly efficient for generating income for grandchildren. Important: bare trust assets are at the grandchild's absolute disposal from age 18 — there is no mechanism to delay the grandchild's access beyond 18 in a bare trust.
18-25 trusts (s71D IHTA 1984) — for grandchildren after a parent's death
An 18-25 trust (s71D IHTA 1984) is a specific type of will trust created for a child who is under 25 when the testator (typically a parent) dies. The beneficiary becomes absolutely entitled to the trust assets by age 25. The IHT treatment: (1) No periodic charge while the beneficiary is under 18 (the trust is within the 'bereaved minor' exemption until 18); (2) Exit charge applies when the beneficiary takes assets between age 18 and 25 — the charge is calculated at a reduced rate (proportional to the years between 18 and the date of the exit, multiplied by a maximum rate of 4.2% — much less than the normal exit charge); (3) By age 25: any remaining trust assets are distributed with a final exit charge if applicable. Who can create an 18-25 trust: it must be created by the will of a deceased parent (or from the Criminal Injuries Compensation Authority). A grandparent's will cannot create an 18-25 trust for a grandchild under s71D — this specific regime is restricted to the parent-child relationship. Grandparents can use a discretionary trust or bare trust instead. For grandchildren whose parent has already died, the parent's 18-25 trust provisions in the parent's will remain relevant to the grandparent's estate planning.
The RNRB for grandchildren — passing the home to grandchildren
The Residence Nil-Rate Band (RNRB — s8D IHTA 1984) is available where the main home passes to 'direct descendants' — a term that explicitly includes grandchildren (and great-grandchildren). If a grandparent leaves the home directly to grandchildren in the will (rather than to their children): the full RNRB (up to £175,000, plus transferred RNRB from predeceased spouse) applies. The home is generation-skipping in two ways: (1) It avoids the children's estate entirely — no IHT on the children's death on this asset; (2) It still claims the RNRB. The will must name grandchildren specifically (or a class of grandchildren by description). If the will leaves the home to a discretionary trust with grandchildren as potential beneficiaries: the RNRB does NOT apply (a discretionary trust is not a direct descendant). The home must pass directly to the grandchildren (or to a bare trust for specific named grandchildren). Grandchildren as remaindermen of an IPDI trust: where the home is in an IPDI trust for the surviving child as life tenant, with the grandchildren as remaindermen — the RNRB applies on the life tenant's death (not the grandparent's).
Frequently Asked Questions
Can I give money to grandchildren to avoid inheritance tax?
Yes — gifts to grandchildren are treated the same as gifts to children for IHT: a direct gift of cash or assets to a grandchild is a PET (s3A IHTA 1984) — IHT-free if the grandparent survives 7 years. Annual exemption: £3,000/yr can be given to any combination of people (including grandchildren) immediately IHT-free. Small gifts: £250 per grandchild per year (unlimited grandchildren). Wedding gifts: £2,500 to a grandchild on their marriage (s22 IHTA). Normal expenditure from income (s21 IHTA): regular gifts from surplus income are immediately IHT-free with no 7-year requirement.
What is a bare trust for grandchildren and does it save IHT?
A bare trust holds assets for a grandchild until they turn 18. The gift into the bare trust is a PET (IHT-free after 7 years). There are no periodic or exit charges (it is not within the relevant property regime). The assets are treated as owned by the grandchild for IHT — they form part of the grandchild's estate (not the grandparent's). Income from a grandparent-settled bare trust is taxed at the grandchild's own income tax rates (the parental settlement rule does not apply — unlike a trust created by a parent). The main limitation: the grandchild can demand the assets at age 18.
Can grandchildren inherit the family home and still claim the RNRB?
Yes — grandchildren are 'direct descendants' for the RNRB (s8D IHTA 1984). If the grandparent's will leaves the main home directly to grandchildren, the full RNRB (up to £175,000 per person, £350,000 for a couple) applies. The home bypasses the children's estate entirely (no IHT on the children's death on this asset) and still claims the RNRB. The will must direct the home to grandchildren directly — a discretionary trust for grandchildren does not qualify for the RNRB.
What gifts can I make to grandchildren that are immediately exempt from IHT?
Immediately IHT-exempt gifts to grandchildren: (1) Annual exemption (s19 IHTA): £3,000/yr total across all recipients; (2) Small gifts (s20 IHTA): £250 per grandchild per year — unlimited number of grandchildren; cannot be combined with the annual exemption for the same grandchild in the same year; (3) Wedding/civil partnership gifts (s22 IHTA): £2,500 per grandchild on marriage; (4) Normal expenditure from income (s21 IHTA): regular gifts from surplus income (above what is needed to maintain the grandparent's standard of living) — uncapped, immediately exempt; (5) Gifts to charities (s23): unlimited. These are all immediately exempt — no 7-year survival needed.
Is generation-skipping more IHT-efficient than leaving money to children?
Often yes — passing wealth directly to grandchildren avoids the second layer of IHT that arises when the children die. If the children's estates are already above the IHT threshold, an inheritance from the grandparent will be taxed at 40% again on the children's death. Skipping to grandchildren removes this double taxation. The trade-off: the children may need access to the funds in the interim. Bare trusts, discretionary trusts with children as potential beneficiaries too, or direct PETs to grandchildren are the usual mechanisms. The RNRB applies whether the home passes to children or grandchildren — the generation skip does not cost the RNRB.
Include Grandchildren in Your Will — Generation-Skip and Save IHT
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