How to Financially Support Your Grown-Up Children. Part 2

And the tax implications of doing so. 

In the second of our two-part series exploring the role of the Bank of Mum and Dad, we look beyond immediate financial support to consider how parents can help their children secure their long-term future. From gifting property and passing on a family business to trusts, pensions and inheritance tax planning, there are many ways to pass wealth between generations. However, even the most generous intentions can have unexpected financial and tax consequences. Here, we explore some of the key considerations when planning how best to protect and pass on family wealth.

You can find the first article in this series here: 

https://www.ritchiephillips.co.uk/insights/how-to-financially-support-your-grown-up-children-part-1

Giving property

Transferring property can involve several taxes. A gift may be treated as a disposal at market value for Capital Gains Tax, even though no money changes hands. Available reliefs, including those relating to a main home, need consideration before proceeding.

Reservation of a benefit 

For Inheritance Tax, giving away an asset while continuing to enjoy it creates a separate problem. The gift with reservation of benefit rules (GWROB) can apply where, for example, a parent transfers a house to a child but continues living there rent-free.

If the reservation of benefit continues until death, the property is generally included in the parent’s estate at its full value at the date of the donor’s death.  Surviving seven years from the original transfer does not solve this problem. Giving up the benefit later generally starts a new seven-year period. Paying a full market rent can end a reservation arising from continued occupation, but the arrangement must be properly established and maintained.

Related pre-owned assets tax rules can also affect arrangements where parents give children money that is then used to buy a home for the parents to occupy. And it is not just property that can fall foul of these rules. For example, a valuable piece of art which a parent purports to give to a child but continues to hang in the parents' home is also likely to come within the remit of these rules.

The practical question is whether you have truly given the asset away, including its enjoyment, rather than simply changed the name on the paperwork.

Passing on a family business

When planning a business succession, separate two questions: who should benefit financially, and who should run the business? They need not be the same people.

One child may manage the business while siblings benefit through ownership.

Alternatively, external management may best serve both the business and the family. A useful test is: if this person were not family, would I appoint them?

Agree how ownership, management, salaries and dividends will work, and what happens if someone wants to leave, sell or challenge a decision. A family constitution can guide these discussions, supported by legal documents that put the arrangements into effect.

Inheritance Tax relief

Before 6 April 2026, assets qualifying for 100% Agricultural Property Relief (APR) or Business Property Relief (BPR) could pass free of inheritance tax without a monetary cap.

Since that date, a combined £2.5 million allowance applies to assets qualifying for 100% APR or BPR. Qualifying value above the allowance generally receives 50% relief, potentially leaving an effective IHT rate of 20% on the excess before other allowances and exemptions.

Unused allowance can transfer between spouses or civil partners, potentially increasing the survivor’s allowance to £5 million. The £2.5 million allowance is fixed until 5 April 2031. Certain shares, including qualifying AIM shares, receive only 50% relief and fall outside this allowance.

APR covers agricultural value, excluding additional development or “hope” value. Land must generally have been occupied for agriculture by the owner for two years or owned for seven years and farmed by someone else.

Lifetime gifts and Capital Gains Tax

Giving assets away during your lifetime can trigger Capital Gains Tax on their increase in value. Qualifying business or agricultural gifts may benefit from hold-over relief, which defers the gain but must be claimed. Assets inherited on death generally acquire a tax value based on their value at death, so earlier gains are not carried forward.

When might a trust help?

A trust may suit parents who want more flexibility over when and how family members benefit as an outright gift puts an asset under the child’s control. In a discretionary trust, trustees decide who receives income or capital within the trust’s terms, allowing support to adapt to changing needs across generations. Other trusts give beneficiaries specific rights, such as an entitlement to income.

The tax position

Each parent may be able to transfer up to their available £325,000 inheritance tax nil-rate band into a discretionary trust without an immediate IHT charge (potentially £650,000 between them). Earlier chargeable transfers can reduce that allowance, so this is not an automatic entitlement every seven years.

Transfers above the available allowance generally attract a 20% lifetime IHT charge. Surviving seven years generally removes the transfer from the death calculation, provided the parent has not retained a benefit.

Transferring assets into a trust can also trigger Capital Gains Tax. Where the conditions are met, hold-over relief may defer the gain rather than eliminate it.

Ongoing charges

Most discretionary trusts can face Inheritance Tax charges at ten-year anniversaries and when assets leave. The anniversary charge can be up to 6%, depending on the trust’s value, available nil-rate band, relevant earlier transfers and applicable reliefs. Income tax and capital gains tax may also arise.

Bare trusts work differently: the beneficiary owns the assets beneficially, so trustees do not have the same continuing discretion. Some interest in possession trusts also receive different tax treatment. The right trust structure depends on the family’s objectives, with the tax consequences understood before assets are transferred.

Pensions and life assurance

Adult children can usually inherit remaining funds from a defined contribution pension, subject to the specific scheme rules. A beneficiary nomination form tells the pension provider who you would like to benefit. You can update it as circumstances change, although it is usually an expression of wishes rather than a binding instruction.

Defined benefit pensions work differently: there is generally no individual pension pot to pass on, and survivor pensions may be restricted to eligible dependants.

Inheritance Tax

Most defined contribution pension funds currently fall outside the estate for Inheritance Tax. However, for deaths on or after 6 April 2027, most unused pension funds and pension death benefits will now be included. This does not automatically mean tax is payable: the estate’s allowances and any applicable exemptions still matter.

Income tax

Separate income tax rules also apply. If the parent dies before 75, many defined contribution benefits can be received free of income tax, subject to conditions, including relevant payment deadlines and limits. If the parent dies at 75 or older, payments to an adult child are generally subject to income tax.

Pensions can therefore still provide for children but should not be assumed to pass on tax-free.

Life assurance

Life assurance offers another route. An appropriately structured policy held in trust can normally provide money outside the estate for beneficiaries, potentially helping meet an Inheritance Tax bill without selling inherited assets. Whole-of-life cover can address an eventual liability and specialist term cover can address the risk of death within seven years of a gift. Premiums and trust arrangements need their own tax review.

Put the arrangement on record

Whatever form the help you choose to give takes, keep records that your family and executors can find: dates, amounts, recipients, valuations, loan agreements and the reasons behind your decisions.

Beware of circular arrangements. Giving money to a child and then borrowing it back can restrict the deduction available for the parent’s debt on death. Transactions need to be considered together.

The Bank of Mum and Dad can offer opportunity, security and a lasting family legacy. A clear plan helps that generosity achieve its purpose while protecting the parents’ future and giving both generations certainty about what has been agreed.

 This guide provides an overview only. It is intended as a general guide only. No action should be taken based on this guide alone. Please contact us before making any decisions or if you would like tailored advice.