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Gifting money to family can make a real difference, but how do you know how much you can afford to give without compromising your own financial future?
We spend much of our working lives building financial security. Paying off the mortgage, saving into pensions, investing for the future and hopefully accumulating enough wealth to enjoy a comfortable retirement.
But as retirement approaches, the questions often begin to change.
Instead of asking, “Have I saved enough?”, you might start wondering, “What should I actually do with the money I’ve accumulated?”
For many people, the answer involves family.
Perhaps you’d like to help your children buy their first home, contribute towards your grandchildren’s education or support loved ones who are facing financial pressures.
You may already intend to leave them an inheritance. But could gifting money to your family during your lifetime make a greater difference than waiting until you’re gone?
And just as importantly, how can you be confident that giving money away now won’t affect your own retirement?
Why consider gifting money to your children during your lifetime?
An inheritance can provide valuable financial support at any age. But the timing of that support can make a significant difference.
Imagine your adult children are in their 30s, managing a mortgage, childcare costs and the expenses of raising a family.
You might intend to leave them a substantial inheritance one day. But depending on your age and longevity, they may not receive that money until they’re approaching retirement themselves.
A gift of £50,000 towards a house deposit at 35 could have a very different impact from inheriting the same amount at 65.
It could help them purchase a home sooner, reduce their mortgage borrowing or provide greater financial flexibility at a particularly expensive stage of life.
There’s also an emotional benefit to giving during your lifetime.
You get to see the difference your money makes.
Whether that’s watching your children move into their first home, helping a grandchild through university or supporting a family member through a difficult period, lifetime gifting can be rewarding for everyone involved.
However, generosity needs to be balanced with financial security.
How much money can you afford to give away?
This is arguably the most important question in lifetime gifting.
Having substantial savings or investments doesn’t necessarily mean that all of that money is surplus to your needs.
Retirement could last 30 years or more. During that time, your financial circumstances may change considerably.
You might face:
Higher living costs due to inflation.
Lower investment returns than expected.
Unexpected property repairs or family expenses.
Changes in your health or care requirements.
A desire to travel, move home or support other family members.
A gift that feels affordable at 65 could look very different at 85.
For example, someone with £800,000 in pensions and investments might feel comfortable giving £100,000 to their children.
But whether that gift is genuinely affordable depends on far more than the size of their portfolio.
Their retirement income, expenditure, State Pension entitlement, other assets, investment strategy and future plans all need to be considered.
The starting point shouldn’t be how much inheritance tax you could save. It should be how much you can comfortably afford to give away.
What are the inheritance tax rules on gifting money to family?
There are several inheritance tax exemptions and rules that may apply when giving money to children, grandchildren or other family members.
Understanding them can help you make informed decisions, although tax considerations should always sit alongside your wider financial plan.
The £3,000 annual gift exemption
Under current UK inheritance tax rules, you can give away a total of £3,000 each tax year using your annual exemption.
This amount can be given to one person or divided between several people.
If you haven’t used your annual exemption in the previous tax year, you may be able to carry it forward for one year.
Other exemptions may also apply, including certain small gifts and gifts made in connection with marriage or civil partnership.
The seven-year rule for larger gifts
Larger outright gifts to individuals are often treated as potentially exempt transfers for inheritance tax purposes.
Broadly speaking, if you survive for seven years after making such a gift, it will normally fall outside your estate for inheritance tax purposes.
If you die within seven years, the gift may need to be taken into account when calculating inheritance tax.
The position depends on the value and timing of gifts, available exemptions and the wider estate. Taper relief can apply in some circumstances, but it doesn’t automatically reduce the tax on every gift made within seven years.
It’s also important to remember that giving away an asset while continuing to benefit from it can trigger different rules.
For example, gifting your home to your children while continuing to live there rent-free may not achieve the inheritance tax outcome you expect.
Gifting from surplus income
One particularly useful, but sometimes overlooked, inheritance tax exemption relates to normal expenditure out of income.
Under this exemption, gifts that meet the relevant conditions can be immediately exempt from inheritance tax, without relying on the seven-year rule.
There is no fixed monetary ceiling, but three key conditions generally need to be satisfied:
The gifts must form part of your normal expenditure, usually demonstrated through a regular pattern or established intention.
They must be made from income rather than capital.
You must retain sufficient income to maintain your usual standard of living.
For example, someone with reliable pension and rental income exceeding their normal expenditure might choose to make regular gifts to their children or grandchildren.
Provided the conditions are satisfied, those gifts could qualify for the exemption.
However, the distinction between income and capital is important. Regular withdrawals from an investment portfolio aren’t necessarily treated as income for this purpose.
Keeping accurate records of income, expenditure and gifts is also essential, as your executors may need to demonstrate that the exemption applies.
This can be an effective part of inheritance planning, but only where the gifts are genuinely affordable.
Should you give money away to reduce inheritance tax?
Reducing a potential inheritance tax liability can be a legitimate reason to consider lifetime gifting.
However, gifting money purely for tax reasons isn’t always the right financial decision.
For example, giving away investments or property could create capital gains tax implications. Withdrawing money from a pension to make a gift may result in an income tax liability.
And once an outright gift has been made, you generally lose control over that money.
There may also be family considerations, such as divorce, financial difficulties or differing needs among children.
Before making substantial gifts, it’s worth considering not only the potential tax benefits but also the practical and personal consequences.
A tax-efficient gift isn’t necessarily a financially sensible gift.
How do inheritance tax changes to pensions affect gifting?
Pensions are another important part of inheritance and estate planning.
From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of an individual’s estate for inheritance tax purposes, subject to relevant exemptions and exclusions.
This is a significant consideration for people who have deliberately preserved their pensions as a way of passing wealth to the next generation.
Historically, some retirement strategies have focused on spending other assets first while leaving pension funds untouched.
The changes mean those strategies may need reviewing.
But this doesn’t automatically mean you should withdraw money from your pension or give it away.
Pension withdrawals can create income tax liabilities, and pensions remain an important source of retirement income.
The most appropriate approach will depend on your circumstances, including your other investments, income requirements, beneficiaries and estate planning objectives.
It’s another reason to consider retirement planning and inheritance planning together rather than as separate exercises.
How cashflow modelling can help you decide how much to gift
One of the most valuable aspects of financial planning is being able to explore different scenarios before making significant decisions.
Cashflow modelling helps illustrate how your finances might develop over time, based on assumptions about income, expenditure, investment returns, inflation and life expectancy.
For example, you might want to understand:
Could you afford to give your children £50,000 each towards a house deposit?
What would happen if you gifted £1,000 a month from surplus income?
Would your retirement still be sustainable if you lived to 100?
How might lower investment returns affect your financial position?
Would you still have sufficient funds for unexpected expenditure or later-life care?
Could you afford to make gifts now and potentially increase them in the future?
By comparing different scenarios, you can begin to understand the trade-offs involved.
Cashflow modelling doesn’t predict the future or eliminate risk. But it can provide a clearer picture of what may be affordable and help you make decisions with greater confidence.
Sometimes the modelling suggests that someone has more financial flexibility than they realised.
Sometimes it demonstrates that making a substantial gift would create unnecessary risk.
And sometimes the best solution is to make smaller gifts over time, reviewing the position regularly.
Five things to consider before gifting money to family
Before making a substantial financial gift, ask yourself:
Can I afford it? Consider your retirement income, future expenditure and the possibility of living longer than expected.
What is the purpose of the gift? Helping with a house deposit, education or general financial security may involve different approaches.
What are the tax implications? Inheritance tax is important, but income tax and capital gains tax may also be relevant.
Do I want to retain any control? An outright gift may not be suitable in every family situation. Trusts or other arrangements may require specialist legal and tax advice.
Have I reviewed my wider estate plan? Your Will, powers of attorney, pension nominations and other arrangements should work together.
Making your money count, now and in the future
Inheritance planning is often presented as a question of how much tax your family might pay when you die.
But there’s a much more personal question behind it.
What do you want your money to achieve?
For some people, leaving a substantial inheritance is the right choice.
For others, helping their family sooner may create more meaningful opportunities.
And for many, the answer will be a balance between enjoying retirement, retaining financial security and giving some wealth away during their lifetime.
The aim isn’t to give away as much as possible.
It’s to understand what’s affordable, make informed decisions and use your money in a way that reflects your priorities.
Good financial planning isn’t just about building wealth. It’s about knowing what to do with it.
Financial planning for lifetime gifting and inheritance
At Glade Financial, I help individuals and families understand their financial position, explore retirement scenarios and make informed decisions about their wealth.
If you’re considering gifting money to your children or grandchildren, but aren’t sure how much you can safely afford to give away, financial planning can help you explore your options.
Find out how financial planning could help you make decisions with greater confidence.
Or get in touch to arrange an initial conversation.
Important information: This article provides general information and does not constitute personal financial, investment, legal or tax advice. Tax treatment depends on individual circumstances and may change.
