The festive holidays wouldn’t be complete without presents in a stocking or under the tree. But there’s also growing incentives for some parents and grandparents to make more significant financial gifts to the next generation as their own tax burden increases.
With income tax bands and allowances remaining frozen until April 2031, there’s an increasing income tax liability for most people. Alongside the tightening net of inheritance tax (IHT), there’s a temptation to shift wealth to the next generation to give loved ones a financial boost as well as manage tax bills. But before you write that big cheque, there are some important steps to go through first.
Familiarise yourself with the inheritance tax gift rules
Once a tax reserved only for the nation’s wealthiest families, IHT has now planted its flag firmly in Middle Britain thanks to a potent mix of house price growth, frozen thresholds, and the inclusion of pension pots from April 2026.
IHT is usually charged at 40% of the value of your estate above a tax-free threshold, known as the nil-rate band. The standard threshold (£325,000) and additional residence nil-rate band (£175,000) now remain frozen until 2030/31 tax year – having already been held in place since 2020. This means as asset prices rise, a greater number of estates start paying the tax.
Christmas gifting can certainly work well as an IHT planning strategy. The easiest way to slim down an estate is to give away money and assets. If you do so during your lifetime, any gifts may be tax free. However, it depends on when the gift(s) were made, their value and whether you lived for long enough after making them.
Broadly speaking, you can transfer money, investments or property to anyone with no immediate IHT liability regardless of the value. And, providing you live for more than seven years after making the gift, it will not land the recipient with a tax bill. However, if you die within that period, the gift will use up some of the nil-rate band.
For gifts that exceed the nil-rate band, and where the donor lives for at least three years, a sliding scale is applied – known as taper relief. This reduces the tax charge on any gifts in the seven-year window that take the total over the threshold.
The younger you are when you start gifting your wealth through these ‘potentially exempt transfers’ or PETs, the less likely you are to die within seven years and for there to be any IHT to pay.
Find out more: The 7-year rule explained
Understand the inheritance tax gift allowances
There are also some useful annual gift allowances exempt from IHT, which may be useful to keep in mind as the festive period approaches.
Remember, if you decide to use some of these tax-free gifts, it’s important to keep a record of how much you gave, when you did it, and to whom. This will simplify things for your executors. A recent survey we conducted revealed that nearly half (45%) of wealthy individuals have no written record of what they’ve gifted to loved ones, which can store up problems for later on.*
Annual exemption
You can give £3,000 a year free of IHT to one person or divide it between as many people as you like. If you do not use the allowance in one tax year, you can carry it forward to the following tax year only.
Small gifts
In addition, gifts of up to £250 per person to any number of people are tax free if these recipients have not received any gift within the £3,000 annual exemption.
Wedding gifts
Wedding gifts made on or shortly before a marriage or civil partnership are exempt from IHT up to the following limits:
- £5,000 where the person making the gift is a parent,
- £2,500 from a grandparent,
- And, £1,000 for all others.
Charitable giving
You can make unlimited transfers to any registered charity during your lifetime or after you die exempt of inheritance tax. Additionally, if the amount gifted to charity in your will is 10% or more of your taxable estate, the IHT rate can be reduced from the standard 40% to 36%.
Gifts as part of normal spending
If you are comfortable enough to have money left at the end of every month, it’s possible to give this away without it being captured by IHT. There isn’t a limit on the number of gifts you can give under this exemption, but they must:
- Be made regularly,
- Be from your surplus income,
- And not mean you dip into your capital to maintain your usual standard of living
One way to take advantage of this rule and pass on your wealth to children and grandchildren is to arrange to pay for contributions to ISAs, Junior ISAs or SIPPs via direct debits. However, you must keep good records of income and expenses that can be used when your estate is valued.
Find out more: Junior ISAs – the secret inheritance tax weapon
Consider whether you can afford to make gifts
Inheritance tax planning is often about striking the right balance between giving money away now and retaining control to make sure you’ll still have enough in later life. When you’re comfortable making an outright gift of an asset and no longer need access or any income from it, then it’s relatively easy.
But you must be careful. Making large gifts will leave you without the money in future should you need it for whatever purpose: be it ticking things off your bucket list, unexpected emergencies, or any costs involved in later life care. It’s great to help your family out and see them enjoy the money, but if in doubt always recall the airline cabin crew advice of ensuring you fit your own life vest before helping others.
Also bear in mind that if you continue to benefit from an asset you’ve given away, different rules apply. This is known as the ‘gift with reservation rules’ which means the gift stays part of your estate forinheritance tax purposes. For example, you can’t simply give away your home and still live in it rent free.
If you are unsure, always seek expert financial advice. A financial professional can act as a valuable sounding board for whether you are doing the right thing and will be able to formulate a strategy that works for your individual circumstances. For larger estates, or where you want to maintain some control of assets, there are also more sophisticated methods involving trusts, though professional advice will be needed to reach the right solutions.
Decide how best to futureproof gifts from tax
It’s important to bear in mind that gifting cash to children can come with tax consequences if it involves larger sums. Parents gifting money to a child should be aware that the child can only earn £100 of interest before tax becomes payable by the adult. In contrast, there is no limit to the amount of interest children can earn from cash given by other family members or friends, but they do have their own tax bands and allowances just like adults.
By saving or investing for your child into a Junior ISA, you sidestep this potential problem as returns are tax free. But if you want to retain easy access to the money, you may decide to pay into a savings account provided by a bank or building society instead. If the child is under 16, a parent can open an account on their behalf. For older recipients opening an account on a cash savings platform can help them gain a competitive interest rate more consistently.
As well as tax-efficient Junior ISAs which have an annual allowance of £9,000 for under 18s, there’s the option to fund pension contributions for a partner, child or grandchild. Even if the recipient does not have an income, £2,880 can be paid into their pension in each tax year, which is topped up to £3,600 by tax relief.
By supplementing pension funding this way there is greater benefit than leaving your pension pot to anyone other than a spouse or civil partner as it could suffer the effect of double taxation – income tax on top of inheritance tax. As a Christmas gift it lacks the personal touch of a carefully chosen present to unwrap, but it’s certainly one that could leave a lasting legacy.
Find out more: Five financial gift ideas for the festive season
*Source: Charles Stanley / Censuswide; sample of 2,001 28+ HNWI (defined as £100k ‘personal’ income OR £100k investable assets, and/or £200k household income). The data was collected between 01/09/2025 and 08/09/2025.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
What you need to know about tax on Christmas gifts
Read this next
Five financial gift ideas for the festive season
See more Insights
