Should you gift money to your children or grandchildren now or leave it to them as an inheritance?

If you’re a parent or grandparent, providing for your family now and in the future is probably an important part of your financial plan.

However, getting the balance right between supporting your children and grandchildren when they need it the most and protecting your long-term security can be complex.

Rising living costs, longer life expectancies and planned changes to inheritance tax (IHT) on pensions (from April 2027) are prompting more people to reconsider their estate plans.

A survey by Canada Life suggests that lifetime gifting is becoming more popular, with 26% of those aged 18 – 44 having received a significant financial gift from a living relative, compared with just 7% of those aged 65 and over.

Moreover, research findings published by Financial Planning Today show that one in seven parents plans to ‘SKI’ (spend the kids’ inheritance) into retirement.

If your main concern about passing on wealth is not ‘how much?’ but ‘when?’, read on to learn about the benefits and limitations of gifting money to the next generation during your lifetime and waiting to leave an inheritance.

Lifetime gifting could be a tax-efficient way to help your loved ones when they need it the most

Your children and grandchildren may benefit most from financial support when they’re buying their first home, funding education, setting up a business or starting a family. As such, gifting some of their inheritance during your lifetime might be more beneficial than waiting to leave it all to them in your will.

The Canada Life research found that 61% of those who received a lifetime gift said it had had a great impact on their life, compared with just 33% who had received an inheritance on the death of a loved one.

Lifetime gifting also allows you to enjoy seeing your loved ones benefit from your wealth and share meaningful experiences with them, such as family holidays.

Additionally, strategic gifting could reduce the IHT payable on your estate when you pass away, allowing your beneficiaries to receive more of your wealth (more on this later).

However, there are potential drawbacks to consider too:

• Loss of control – Once given, the recipient of your gift could spend it in ways you feel are wasteful or inappropriate. Alternatively, they may lose it in a divorce, resulting in your money going to an unintended beneficiary
• Less financial security – Gifting reduces the funds you have available to pay for unexpected costs, later-life care or a long retirement
• Family tension – Unequal gifts may lead to disagreements and damaged relationships
• Tax complexity – Gifting tax-efficiently requires a good understanding of IHT exemptions and allowances as well as careful record-keeping

How inheritance tax gifting rules work

The government allows you to make certain lifetime gifts that are immediately exempt from IHT, including:

• Annual exemption – You can give up to £3,000 each tax year. Any unused allowance from previous years can be carried forward for one year
• Small gifts – You can give up to £250 to any number of people each tax year without triggering an IHT charge, provided you have not used another exemption for that person
• Wedding or civil partnership gifts – You can give up to £5,000 to a child, £2,500 to a grandchild or great-grandchild or £1,000 to anyone else without an IHT charge
• Regular gifts from surplus income – You may be able to make regular gifts without them counting towards the value of your estate for IHT purposes, provided they are made from income (not capital) and do not reduce your usual standard of living

You can also give larger amounts – ‘potentially exempt transfers’ – that fall outside of your estate for IHT purposes if you live for seven years after making the gift. If you die within seven years, these gifts may be included in IHT calculations. However, ‘taper relief’ could reduce the IHT payable on gifts made between three and seven years before death.

Leaving your family an inheritance could protect your financial security during your lifetime

The prospect of living longer can be a reason both to pass on wealth earlier and to hold on to it.

Retaining assets could give you the control and flexibility to fund the life you want and cope with unexpected costs, such as later-life care.

You might also want to leave a lasting legacy by, for example, donating to charitable causes or setting up trusts to give your children and grandchildren a financial safety net.

Preserving your wealth may allow you to protect your financial security while also supporting the next generation by keeping an up-to-date will that reflects your wishes and your family’s current needs.

However, you could miss out on valuable IHT gifting allowances and exemptions. Moreover, your beneficiaries may not inherit until their 50s, 60s or later when your wealth may have made a much bigger difference earlier.

5 questions to help you decide which path is right for you and your family

There is no ‘right’ answer to the question of when to pass on wealth to your children and grandchildren; it will depend on your specific circumstances and goals.

These five questions might help you weigh up the relative pros and cons of each option:

1. Can I afford to gift – and if so, how much? – without compromising my lifestyle, future care plans and ability to cope with emergencies?
2. What do I want my wealth to achieve and is a financial gift the best way to reach this goal?
3. How much do I want to gift to each person? Are equal shares suitable or would gifting according to need be fairer?
4. How might gifting affect my tax position and a future IHT bill on my estate?
5. Is it important to see my family enjoying their inheritance during my lifetime?

You might decide that a hybrid approach works best for you. In other words, planning affordable and tax-efficient lifetime gifts while also keeping sufficient wealth to maintain your financial security.

Your financial planner can use cashflow modelling to show how gifts could affect your long-term financial plan, allowing you to make informed choices that benefit you and your family.

We work closely with the trusts and estates team at PKF Francis Clark, so your financial, tax and trusts advice sits under one roof. This joined-up approach ensures you receive the specialist advice you need and that your estate plan aligns with your broader financial goals.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, trusts or will writing.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.