If you understand it, tax efficiency is the gift that keeps giving. But let’s be honest, most people don’t understand it, and it breaks our hearts 💔 But in the spirit of Christmas, we’re giving you the ultimate guide to gifting money to children tax-efficiently. Thank us later!
Let’s start with the basics – the bits you want to know, the facts, the stats and the best way to gift children money:
In most cases, you can gift smaller sums of money, up to £250 a year, to as many people as you want.
The catch? You can’t combine this with your annual tax-free gift allowance.
Everyone likes to be treated once in a while and that doesn’t change as children grow. But, what does change is their employment status.
If you’re worried that gifting cash might push your children into a higher income tax bracket, don’t be, because HMRC doesn’t count gifts as income. Your children won’t have to pay income tax on any money you gift them.
Did you know that there’s an allowance if you’re giving money to your child as a wedding gift? You can gift your children up to £5,000 to make their day extra special. And with beverages flowing at the reception, you might decide to combine this with your £3,000 annual gift allowance, meaning you could gift up to £8,000 tax-free!
Was it HMRC that once said, gift from the heart, not the head ?
Okay, maybe not 🫣, but they did set a limit of £100 on the interest a child under 18 can earn tax-free on the money you gift them. The reason for this is to prevent parents from using their child’s tax-free allowance to avoid income tax on their own personal income.
But this limit doesn’t apply to money gifted from grandparents, relatives or friends. Plus interest earned on savings in a Junior ISA or Child Trust Fund is also exempt from this limit!
If you’re planning on gifting your child over £3,000 without paying tax, you’ll need to live more than seven years after they receive it – no pressure 🫠
But, if you pass within seven years of giving the gift, it may be subject to Inheritance Tax. The amount of tax charged depends on how long before your death the money was gifted.
For this purpose, you should keep a record of the nature of the gift, who you gave it to, when you gave it, and how much it was worth 🖊️
Inheritance tax (IHT) rates in the 2025/26 tax year 👇
| Inheritance type | Tax-free threshold | Rate payable after threshold |
| Standard | £325,000 | 40% |
| Children, grandchildren | £500,000 | 40% |
| Spouse, civil partner, charity | No limit | 0% |
| Charity donation | 10% or more of estate value | 36% |
| Small gifts | £3,000 per tax year | 40% |
| Agricultural property | £1m* | 20% |
*there’s also a 50% tax relief for farmers with land worth more than £1m. Check out HMRC for more on this.
Your children will pay inheritance tax if you pass away within seven years of gifting them a sum of money over your personal allowance. Take a look at the below:
| Years between gift and death | Tax rate |
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 years or more | 0% |
To gift money to your children tax efficiently, remember these three things:
☝️ Don’t gift over your yearly tax-free gift allowance of £3,000
✌️ Make the most of wedding allowances, roll-overs and other tax-free occasions
🤟 If you gift sooner rather than later, you won’t be subject to high IHT rates
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