Ingenious ways to pass on your wealth inheritance tax-free – without turning your children into lazy brats

Many families would far rather pass wealth to the next generation than have it seized by the taxman but are wary of giving children and grandchildren too easy a ride.

It’s a classic conundrum. How do you give away your hard-earned money without undermining the values of hard work and financial responsibility you hope to instil in your offspring?

But the pending inheritance tax levy on unspent pensions, and the threat of a further tax raid in this autumn’s Budget, has prompted many families to consider how to reduce the bill without further delay.

Spending or gifting your money are the easiest ways to avoid inheritance tax legally.

The first is straightforward enough. But wealth planners tell us that while many people are weighing up how best to gift money to younger family members, they have worries about the effect this may have. This can in some cases be down to a lack of trust that they won’t just fritter it away.

However, it is also about ensuring that your loved ones get a good start in life without taking their good fortune for granted or failing to learn how to manage their own finances sensibly.

‘How to strike the right balance between tax-efficient estate planning without demotivating the next generation is a recurring issue among our clients,’ says Olly Cheng, financial planning director at Rathbones.

‘Many of them have a story about an acquaintance where the parents were a bit too generous, and as a result their children never had the drive to make the most of their careers.’

With pensions being caught in the inheritance tax net from April 2027, making plans to reduce the bill is becoming more urgent, according to Zohaib Mir, a financial planner at EQ Investors.

‘The so-called Bank of Mum and Dad remains open, but parents are increasingly thoughtful about how support is provided,’ he says.

‘Support can empower ambition – it doesn’t have to dilute it.’

Some gifts, such as help to buy a home, can intensify the need to keep working hard rather than detract from it, agrees Anthony Fuller, a chartered financial planner at Path Financial.

He points out a large money gift or inheritance can give someone the freedom to change jobs or even their careers. Suddenly, a more enjoyable but less well-paid job may be affordable.

‘Examples I have come across are clients who have given up their full-time jobs to work for a charity on less money, set up their own business or retrained because they have become unhappy in their previous career,’ he says. So, if you think there is cause for concern about how your wealth will be spent or want to ensure it has a positive impact, how do you retain control or simply put your money towards worthwhile goals? Here are the experts’ smartest tips.

SHOW THEM HOW IT’S DONE WITH A JUNIOR ISA 

Investing alongside your children, whether they are under 18 or adults, can give them a good start in life, stop them just spending the money you hand over, and teach them valuable lessons.

You can put up to £9,000 a year in a Junior Isa for a child, who can start managing the account when they are 16 but cannot make a withdrawal until they are 18.

This offers a great opportunity to teach children about investing, and to get them involved in an age-appropriate way.

You can ‘consult’ them on buying and selling decisions, and, as they grow up, switch roles, so you become the ‘consultant’.

Over-18s run their own stocks and shares Isas, but you can still influence an adult child by agreeing to match whatever they put in, or invest alongside them.

You can also swap ideas about what you are putting in your own Isa and pursue parallel or contrasting investment strategies.

Mr Cheng says: ‘The most important thing is to start having money conversations with your children as early as possible.

‘It is never too soon to instil the value of long-term savings and to discuss what financial milestones any gifts are intended for.’

An increasing number of people are making gifts out of surplus income because they will be exempted from inheritance tax.

If you are doing this, your children’s and grandchildren’s Isas are one of several useful destinations for this cash.

Mr Mir says it will help reduce the size of an estate over time while encouraging financial engagement from the recipient.

‘In one case, a parent offered to top up their daughter’s Isa by £500 a month – on the condition she saved the same from her salary,’ he says. ‘It became a shared goal and a way to build investmentconfidence together.’

PUT MONEY TOWARDS PRIVATE SCHOOL FEES 

Wealthy grandparents may want to contribute or assume full responsibility for private school fees to remove the burden from their adult children. Again, this can be done out of surplus income to cut an inheritance tax bill.

You will need to keep good records showing a regular pattern of giving for this to pass muster with the taxman.

Another advantage is you can transfer the money direct to the school, without it having to pass through any other hands first.

By contrast, certain financial products, such as Isas and some pensions, can only be run by parents or an adult account holder. That involves trusting them to use the cash you hand over as intended.

Beyond private school fees, you can chip in for other practical needs, such as funding childcare or adult education to help parents retrain or return to work.

HELP THEM GET A GRIP ON UNIVERSITY COSTS 

Higher education is a huge financial undertaking. Young adults in England are now leaving university with an average of £53,000 in loans, according to the Student Loans Company.

‘It’s not just about tuition,’ says Henrietta Grimston, financial planner at Saltus. ‘Accommodation costs vary wildly. Even with a full loan, some students are left with nothing once rent is paid.’

She says, however much you would like to help out, given the cost involved you should first do a reality check on what you can afford.

Then there is the dilemma – to which there is no hard and fast answer – over whether simply to cover the bills yourself, therefore cutting interest payments on a loan, or to let a child take out a loan while assisting in other ways.

Ms Grimston suggests a halfway house, saying: ‘One client family cleared their child’s loan on graduation, but asked them to pay back the equivalent amount to the Bank of Mum and Dad over time. It wasn’t interest-bearing, but it wasn’t a free ride either.’

She says it’s important to talk to your child about how student finance works – including interest, repayment thresholds and budgeting – because many will encounter overdrafts and credit cards for the first time while they are at university.

One other important point is being fair to siblings, whether children or grandchildren, who take different paths in life and may not go to university. ‘Where one child may need more help now, it is common for parents to balance this out later,’ says

Ms Grimston. ‘But it is important to document your intentions and consider family dynamics, especially where differing needs are involved.’

PASSING ON WEALTH? IT’S A QUESTION OF TRUST 

Giving an early inheritance but putting it in trust is a popular way among wealthy families to pass money down the generations. It can also allow you to steer what happens next.

A discretionary trust hands you a great deal of control over how your money is used, and you can even be a trustee yourself.

That includes setting rules, such as age thresholds and conditions for releasing funds, and linking them to education or buying a home.

Anthony Fuller of Path Financial says: ‘We have recently assisted a couple in setting up a discretionary trust for their children.

‘There are multiple benefits to this, one of the main ones being that the parents retain control of the trust and when to distribute the assets to their children.

‘The rising number of estates paying inheritance tax, plus a difficult job market for new graduates, means more clients are considering how to help their children now without spoiling them.’

Mr Cheng says trusts aren’t for everyone and are more about control than optimal tax planning. But for the right families, in particular ‘blended’ ones, they can be a good solution. He suggests that another good option is to set up a general investment account via a financial adviser which is owned and run by the recipient.

‘There is a big psychological difference between money held in a bank account and money held with a professional intermediary,’ he says.

‘While it’s easy to keep dipping into a cash balance without much thought, making a phone call to the family advisers to take out a lump sum adds a significant barrier to access, albeit with none of the legal protections given by a trust. In practice we see this work well, even though there are no guarantees.’

Be aware that you usually cannot continue to benefit yourself from a trust if you want the money and assets in it to be exempt from inheritance tax.

There are many types of trusts, and layers of costs and tax charges to be dealt with, so it is essential to get professional advice.

Read our in-depth guide to trusts and inheritance tax at thisismoney.co.uk/trusts.

GIVE THEM A HELPING HAND TO BUY A HOME 

Property costs are so high that any help you can give will be valuable, but home ownership is not just a financial matter. It comes with many other responsibilities.

Purchase costs, such as the deposit, stamp duty or legal fees, are a one-off. But you might want to think carefully about whether to assist with ongoing bills or mortgage payments, or whether to let a child or grandchild take full charge of the household finances.

From a practical perspective, be clear up front whether any contribution is a loan or a gift.

See a lawyer to get a formal agreement set up if necessary – and especially if an adult child’s partner will be moving in and could claim part ownership rights in future.

PUT THE MONEY INTO A PENSION FOR LATER ON 

Putting aside money for children which they can’t get their hands on until retirement is one of the safest and most sensible ways to help them out. 

At present, you can’t access private pensions until 55, and this will rise to 57 in spring 2028 and is likely to go up again in coming years.

For children and non-taxpaying adults, you can put £2,880 a year into a pension and the Government will top that up to £3,600.

Mr Cheng says for under-18s, parents or legal guardians have to be the ones to set up and manage the pension. ‘One person needs to have full oversight of what goes in, as otherwise it is very easy to exceed the £2,880 limit for non-earners,’ he explains.

At 18, a junior self-invested personal pension (Sipp) converts automatically into a regular one, and the holder gains control over their own pension.

With work pensions, rules differ depending on the type of scheme and how it is set up, so you will have to check, but many will not accept direct payments from outsiders. You may therefore have to trust your family member to put your contribution in their pension.

TREAT THE FAMILY TO A LUXURY HOLIDAY 

Paying for family holidays is one of the more enjoyable ways to share your wealth and create memories for the whole family.

You may not want adult children to feel entitled to all-expenses-paid trips abroad though, so you could balance your generosity with a requirement for them to put their hand in their pocket.

If you would like some family members to pitch in, you can ask them to buy their own flights, share accommodation costs or pay for some meals out or excursions.

Whatever you do pay counts as a gift and falls under the ‘seven-year rule’ for inheritance tax, which has a £3,000 a year tax-free limit, so bear this in mind if your estate is large enough to pay death duties.

INHERITANCE TAX: WHAT YOU NEED TO KNOW

Everyone has a £325,000 inheritance tax-free allowance, known as the ‘nil rate band’, which can be doubled to a joint £650,000 if you are married or in a civil partnership.

A further ‘residence nil rate band’ allowance of £175,000 per person applies if you own your home and leave it to direct descendants, delivering a maximum IHT-free allowance of £1million for a couple.

An individual can make gifts adding up to an overall £3,000 a year, without them being liable for inheritance tax. They can also make unlimited small gifts of £250, but they cannot make more than one of these to the same person.

There is a special extra allowance for wedding gifts, of up to £5,000 to your own child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.

Beyond these exemptions, you give away as much as you want, but the gifts will fall under the so-called seven-year rule.

Officially, such gifts are called ‘potentially exempt transfer’ gifts, because if you survive seven years the gift becomes free of IHT. They are taxed on a sliding scale if you die sooner.

Another exemption exists for gifts from surplus income.

These can be unlimited and immediately fall out of the inheritance tax net, but HMRC specifies they must be part of normal expenditure, made out of income, and leave you with enough income to maintain a normal standard of living.

The normal expenditure qualifier is a grey area, but is commonly judged to mean they are regular gifts and HMRC refers to a pattern of giving.

When making use of this exemption, it is essential to ensure that you have detailed records of your income in order to back up your case.

These should track your income and expenses and record the gifts you make.

Seeking help from an independent financial adviser or qualified tax adviser is also highly recommended.