Inheritance Tax Planning: Why Gifting to Grandchildren Could Save Your Family Thousands

Inheritance tax (IHT) is often described as the UK’s “most hated tax”, and it’s easy to see why.

At 40% on estates above the nil rate band, it can significantly reduce the wealth passed down to future generations. However, with careful planning, IHT can often be reduced—or even avoided entirely.

One commonly discussed strategy is gifting assets during your lifetime. But rather than gifting to your children, it may be more effective to skip a generation and gift directly to your grandchildren.

Why gifting to children isn’t always the best option

A typical starting point for IHT planning is to gift money to adult children.

However, this can create unintended consequences.

If your children already have:

• Property
• Savings
• Investments

Then receiving a large gift may increase their estate, potentially exposing more of their wealth to IHT in the future.

The advantage of ‘generation skipping’

By gifting directly to grandchildren (or even great-grandchildren), you can:

• Reduce your own estate for IHT purposes
• Avoid increasing your children’s estate
• Spread wealth across more individuals, making better use of allowances

This is particularly effective where:

• Your children do not need the funds immediately
• The money would ultimately be used for the grandchildren anyway (e.g. school fees, support, deposits)

Funding grandchildren: A practical example

If your adult child is already paying for:

• School fees
• Childcare costs
• Living expenses for their children

You could instead:

• Gift funds directly to the grandchildren
• Or cover those costs yourself

This approach can be combined with gifts out of surplus income, which—if structured correctly—can fall outside your estate immediately for IHT purposes.

A key tax advantage: Avoiding the parental settlement rules

There is an important tax rule to be aware of.

If parents gift money to their minor children:

• Any income above £100 per year is taxed on the parent, not the child

However, this rule does not apply to grandparents.

This means:

• A grandparent can gift, for example, £100,000
• Any income generated is taxed on the child
• And in many cases, it falls within the child’s personal allowances

This can result in significant income tax savings.

Using Junior ISAs to build tax-free wealth

Children under 18 can benefit from a Junior ISA allowance of £9,000 per tax year.

For grandparents who have already used their own ISA allowance, this creates an opportunity to:

• Build tax-free savings for grandchildren
• Shelter income and gains from tax
• Provide a valuable financial head start at age 18

While funds are locked away until adulthood, this can be a positive feature for long-term planning.

Managing control: Using trusts for younger beneficiaries

A common concern is whether young beneficiaries are ready to manage significant sums.

This is where trusts can be useful.

Options include:

• Bare trusts – simple and tax-efficient
• Discretionary trusts – more control over how and when funds are distributed

Parents can act as trustees, ensuring:

• Funds are used appropriately
• Access is controlled
• Long-term family planning objectives are met

Missed the opportunity? Consider a deed of variation

If lifetime gifting hasn’t been possible, there is still an option after death.

A deed of variation allows beneficiaries to redirect inherited assets.

For example:

• Assets left to adult children can be redirected to grandchildren
• Or placed into a trust for their benefit

If completed within two years of death, the arrangement is treated for IHT purposes as if the gift was made by the original deceased.

This means:

• The assets never form part of the child’s estate
• Future IHT exposure can be reduced

However, it’s important to note:

• Income tax rules do not always follow the same treatment
• Professional advice is essential before proceeding

Final thoughts: Think beyond the immediate generation

Effective inheritance tax planning is not just about reducing tax today—it’s about protecting wealth across generations.

Skipping a generation can:

• Prevent compounding IHT liabilities
• Improve tax efficiency
• Ensure wealth reaches those who need it most

Need help with inheritance tax planning?

At Merranti Accounting, we help families structure their wealth to minimise inheritance tax and maximise what is passed on.

If you’re considering gifting, trusts, or estate planning strategies, get in touch with our team for tailored advice