What Is the Best Way to Leave Inheritance to Children?

The residence nil-rate band only applies when you leave a qualifying residential property to direct descendants: children, stepchildren, adopted children, or grandchildren. Without a will naming them as beneficiaries, this allowance goes to waste. So the will is where it all starts.

Married couples should plan together, because when the first spouse dies, their unused nil-rate band and residence nil-rate band transfer to the survivor. That means up to £1 million can pass to children free of IHT when the second spouse eventually dies.

Alongside the will, consider making lifetime gifts early. Gifts to children become fully IHT-free after seven years, and regular gifts out of surplus income are immediately exempt with no upper limit if they meet HMRC's conditions.

If you want to control how and when children receive assets, particularly for younger beneficiaries, a trust is an option. Trusts carry their own tax charges and costs though, so take professional advice before setting one up.

Gifts you make to your children become completely IHT-free if you survive for seven years after making them. Die within three years and the full 40% rate applies. Between three and seven years, taper relief reduces the tax rate on a sliding scale: 32% at three to four years, 24% at four to five, 16% at five to six, and 8% at six to seven. Taper relief only matters when your cumulative gifts exceed the £325,000 nil-rate band. Below that threshold, there is no tax to taper regardless of timing. You also have annual exemptions that leave your estate immediately, with no seven-year wait. Each parent can give £3,000 per tax year (and carry one unused year forward). Small gifts of up to £250 per recipient are also exempt, and wedding gifts have their own separate limits. The most powerful exemption is regular gifts from surplus income. If you can demonstrate that a gift forms part of a pattern, comes from income rather than capital, and does not affect your standard of living, there is no upper limit. Parents paying school fees, funding a child's rent, or making monthly contributions to a Junior ISA can all qualify under this rule.

A discretionary trust gives you control over when and how children receive assets. Trustees decide distributions, which is useful if beneficiaries are young or financially inexperienced. The trade-off is a 20% entry charge on amounts above the nil-rate band, plus periodic charges every ten years and exit charges on distributions. There are also other disadvantages of putting assets in a trust to weigh up. A bare trust is simpler. The child has an absolute right to the assets from the moment they are placed in trust, but cannot access them until age 18. For IHT purposes, a gift into a bare trust is treated as a Potentially Exempt Transfer, so it falls out of your estate after seven years. There are no periodic or exit charges. Junior ISAs offer a tax-free wrapper with a £9,000 annual subscription limit. The child cannot touch the money until they turn 18. If you fund contributions from surplus income, the gifts can be immediately IHT-exempt with no seven-year wait. The right choice depends on the size of the gift, your need for control, and how old the children are. For smaller amounts where you are comfortable with the child accessing funds at 18, a Junior ISA is the simplest route. For larger sums where you want trustee oversight past age 18, a discretionary trust is worth the added cost.

The residence nil-rate band (RNRB) adds up to £175,000 per person on top of the standard nil-rate band, but only when you leave a qualifying home to direct descendants. For a married couple, that means up to £350,000 of extra IHT-free allowance tied specifically to the property. Your estate must be worth £2 million or less for the full RNRB. Above that, it tapers away at £1 for every £2 over the threshold, disappearing entirely at £2.35 million. If your estate is near that line, lifetime gifting to bring the value below £2 million can unlock the full RNRB. If you downsize to a smaller property or move into care, a "downsizing addition" preserves the RNRB you would have qualified for, provided you leave equivalent assets to direct descendants. You do not lose the relief simply because you sold the family home. Giving the property away while continuing to live in it does not work for IHT. HMRC treats this as a "gift with reservation of benefit" and includes the property in your estate at death unless you pay a full market rent. For inheritance tax planning involving property, professional advice is essential to avoid this trap.