This guide explains how inheritance tax (IHT) works, including the new pensions and gifting rules that parents should consider. Everything that you need to know about Inheritance Tax for parents and how to save money for your kids.
Inheritance Tax Guide to Gifting and Pensions for Families 2026
New rules state that from April 2027, any unused private pensions are expected to be counted within your estate and subject to inheritance tax. For parents, that could take your family wealth over the IHT threshold and therefore create an unexpected tax bill, which could cause issues with money passing to your children.
Planning for this now can help you to support loved ones with things like the costs of schools and university, childcare, and first homes. Most importantly, you should be focusing on keeping your tax liability to a minimum and maximising your children’s inheritance pot.
Family Tax Expert: Guide to gifting and pensions to minimise your Inheritance Tax liability.
- From April 2027, leftover private pensions are due to count towards your estate for inheritance tax.
- Standard inheritance tax is 40% on estates above £325,000, or up to £500,000 if a home passes to direct descendants, subject to conditions.
- Annual gifting allowances, small gift limits and the seven year rule can reduce the value of your estate.
- Keeping simple, dated records of gifts makes life much easier for your executors.
This guide explains the main rule changes that you need to be aware of, the allowances for giving money away, how the seven-year rule works, and simple record-keeping tips. We have also added practical shortcuts so busy parents can save both time and cash when they’re planning for their children’s future.
How will the new pension rule in 2027 affect inheritance tax for families?
Today, many discretionary private pensions can usually be left to beneficiaries tax-free. From April 2027, the value left in those pots is set to be added to your estate when working out inheritance tax. If your pension is over a certain amount, this change could push an otherwise non-taxable estate over the line.
Inheritance tax is typically charged at 40% on wealth above £325,000. If you leave your home to children or grandchildren, an additional main residence band can lift the effective threshold to as much as £500,000, provided criteria are met. Parents with home equity, savings and a decent pension could therefore be caught once pensions are counted.
For a plain English overview of inheritance tax, see the official UK government guide. For how pensions pass on death, read Pension Wise’s explanation of what happens to your pension when you die.
How does gifting money to your children now reduce inheritance tax?
Helping with rent, nursery fees or a first home deposit can also trim future tax. The rules below focus on what most parents use in practice.
Annual allowances at a glance
| Type of gift | Limit | Notes for parents |
|---|---|---|
| Annual exemption | £3,000 per tax year | Unused allowance can be carried forward one year, so up to £6,000 if last year’s was not used. |
| Small gifts | £250 per person | You can give £250 to any number of people each year, as long as no other exemption is used for that person. |
| Wedding or civil partnership gifts | £5,000 to a child, £2,500 to a grandchild, £1,000 to others | Given before the ceremony takes place. |
| Regular gifts from surplus income | No fixed cap | Must be affordable from ongoing income and part of a pattern, for example termly school fees or a monthly allowance. |
What is the seven-year rule, and how does it work?
Larger gifts that are not covered by the allowances above can still be effective. If you survive seven years after making a gift, it usually falls outside your estate. If death occurs sooner, the gift may be counted back in and could be taxed. Between years three and seven, taper relief can reduce the effective rate.
- Death within 0 to 3 years of the gift – up to 40% applies.
- Between 3 and 7 years – the effective rate tapers down, potentially to 8% by year seven.
- Survive 7 years – the gift is normally free of inheritance tax.
What everyday gifts are exempt from inheritance tax?
- Paying premiums into a life insurance policy held in trust for your children.
- Contributing a regular amount towards grandchildren’s school or uni fees from spare income.
- Setting a birthday or Christmas standing order from income.
- Covering a relative’s ongoing care costs if affordable from income.
What are the easiest ways to keep records and track your inheritance tax?
Use a simple spreadsheet or notes app. Record the date, amount, recipient, which exemption you used and whether the money came from income or savings. Keep bank statements and any letters. These notes help your executors calculate any tax quickly and avoid delays for your family.
Is inheritance tax just for cash gifts to my children?
Gifts that reduce the value of your estate include property, shares, premium bonds, jewellery and artwork. Paying someone else’s living costs can also count. Charitable gifts are fully exempt, and if at least 10% of your estate goes to charity, the rate on the remainder can fall from 40% to 36%.
Who pays inheritance tax liability?
Usually the estate pays the bill before assets are passed on. If you gave large amounts in the seven years before death that exceed available allowances and the estate cannot cover the tax, the recipient may become responsible for a share. This is another reason to document gifts clearly.
Questions parents ask about Inheritance Tax
Can I help with a house deposit without triggering tax?
Yes. Use the £3,000 annual exemption, any carry forward from last year, and the £250 small gift rule for other family members. Larger top ups can still work using the seven-year rule. Lenders often ask for a gifted deposit letter, so keep paperwork ready.
Should I draw my pension sooner because of the 2027 change?
Not automatically. Taking money out early can create income tax and reduce long-term growth. Balance three things – your spending needs, potential inheritance tax from 2027, and the value of keeping funds invested. A regulated financial adviser can model the trade-offs for your family.
Are trusts worth it for avoiding inheritance tax?
Trusts can ringfence money for children and sometimes reduce tax, but they add admin and may have charges. Read the government’s overview on trusts and taxes and consider advice if the sums are significant.
What happens if I die within seven years of a large gift?
Your executors will include the gift when working out tax. Taper relief may reduce the effective rate after three years. Good records help ensure the correct calculation and avoid paying more than needed.
Does giving to charity reduce the tax rate?
Yes. Leaving at least 10% of your net estate to charity can cut the rate on the rest from 40% to 36%. This can be a smart way to support causes you care about and lower the family’s bill.
Time and money saving tips about inheritance tax
- Complete pension expression of wish forms so providers know who should receive your pot quickly.
- Use Junior ISAs and Lifetime ISAs for children’s savings goals. These sit outside your estate while owned by your child and can build a property deposit over time.
- Consider life insurance written in trust so a payout reaches your family swiftly and usually outside your estate.
- Where possible, pay support from surplus income rather than from savings, and document the pattern.
- Keep your will up to date and store it where family can find it fast.
Next steps and helpful resources to save money on inheritance tax
Start by totting up your estate value, including pensions, then map out gifts you can afford. Review beneficiary nominations on every pension and life policy. For clear, trusted guidance, see the government’s page on inheritance tax, independent help from Citizens Advice, and MoneyHelper on pensions on death. If you are making large gifts or your estate is complex, speak with a regulated financial adviser or solicitor.
Note: Rules and allowances are based on announcements current as at 1 September 2025. Tax can change, so always check the latest official guidance before acting.
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Other common inheritance tax questions for parents
Who will the April 2027 pension change affect?
The change is expected to affect many private pensions where you can nominate beneficiaries, with any unused value from 6 April 2027 being added to your estate when working out inheritance tax. The final scope will depend on legislation and individual scheme rules, so check your provider’s guidance and review the government’s overview of inheritance tax alongside MoneyHelper’s guide to pensions on death.
How do I estimate whether my estate could face inheritance tax after 2027?
Start with a quick worksheet:
- Add up your home value, savings, investments and other assets, then include the amount you expect to leave in private pensions after 6 April 2027.
- Subtract mortgages and other debts.
- Compare the result with £325,000, or up to £500,000 if your home passes to direct descendants and the conditions for the main residence band are met.
If the total exceeds those figures, plan gifts and nominations early. For the rules in plain English, read the official page on inheritance tax.
Can I use the small gifts allowance and my £3,000 annual exemption for the same person?
No. You can give up to £250 to any number of people each tax year under the small gifts rule, but you cannot combine that £250 with another exemption for the same person in the same tax year. If you want to give more than £250 to one person, use your £3,000 annual exemption instead, or consider the seven year rule for larger amounts. See the government guidance on gifts and exemptions.
What counts as a regular gift from surplus income?
These are ongoing payments that are affordable from your normal income and leave you with enough to maintain your usual standard of living. Examples include a monthly allowance for a child, termly school or uni fees for a grandchild, or paying an insurance premium for a policy held in trust. To support the claim, keep evidence that the gifts form a pattern and come from income rather than savings.
What evidence should I keep for gifts from income?
Keep it simple but thorough:
- A short note or spreadsheet recording the date, amount, recipient and that the gift comes from income.
- Bank statements showing the incoming pay or pension and the outgoing gift.
- A brief income and outgoings summary to show affordability.
- Copies of any standing orders or letters that explain the intention to make regular gifts.
These records make it easier for executors to claim the exemption and avoid delays.
How does the seven year rule and taper relief work in practice?
Larger gifts that are not covered by allowances are usually outside your estate if you survive seven years. If death occurs sooner, the gift may be counted back in. Between years three and seven, taper relief can reduce the effective rate on the gift. For example, a gift made five years before death may be taxed at a reduced effective rate compared with a gift made one year before death. Good records help ensure the correct calculation and prevent overpaying.
Do gifted house deposits cause mortgage issues and what should a letter include?
Lenders are used to gifted deposits, but they typically require a simple letter. This should confirm that the money is a genuine gift, that there is no requirement to repay it, that you will not take a charge over the property and that you have provided proof of funds and ID when requested. Keep a copy with your records and note which exemption or rule you are relying on for inheritance tax purposes.
Are Junior ISAs and Lifetime ISAs inside my estate if I fund them for my child?
No. A Junior ISA is owned by the child, not the parent, so it sits outside the parent’s estate. If you contribute to an adult child’s Lifetime ISA, that money becomes your child’s asset immediately. Your contributions are gifts for inheritance tax purposes, so they may be covered by your annual or small gift allowances, by the regular gifts from income exemption, or by the seven year rule. For product basics, see the government pages on Junior ISAs and Lifetime ISAs.
Who pays inheritance tax on gifts if I die within seven years?
Normally the estate pays any bill before assets are passed on. If the estate cannot cover the tax due on gifts made in the seven years before death, the recipient may become responsible for a share linked to what they received. Clear, dated records help executors work this out accurately and avoid unnecessary tax.
