Should you loan money to your children or gift it? Why this decision matters more than you think

"Should I loan this money to my daughter or just gift it to her?"

This question comes up repeatedly in my work with families across Bristol and North Somerset, usually from parents wanting to help adult children with house purchases, renovations, or getting established in their careers.

On the surface, it seems like a straightforward financial decision. In reality, the choice between loaning and gifting money to your children has profound implications for your inheritance tax position. For inheritance tax purposes, a loan to your child stays in your estate until it's repaid, while a gift can leave your estate completely if you live for seven years after making it.

The appeal of loans

I understand why loans feel safer for many parents. A loan maintains a sense of control and teaches responsibility. It preserves the option of having money returned if circumstances change. For parents with multiple children, loans can feel fairer – each child "borrows" what they need, and everything balances out eventually.

The thinking goes: "I'm helping, but I'm not just giving money away. They'll pay me back, so my financial position stays protected."

It's logical and cautious. And from an inheritance tax perspective, it's often the wrong approach.

What happens to a loan when you die?

Here's what many families don't realise: a loan to your child never leaves your estate. The outstanding amount is a debt owed to you, and HMRC counts it as part of your taxable estate when you die. Your executors may also need to call the money in from your child to settle any bill.

Let me be clear about what this means. You've transferred money to your child. They've used it – perhaps for a house deposit or renovations. But because it was structured as a loan rather than a gift, the value stays in your estate for inheritance tax purposes.

The loan must be properly documented for this to be enforceable. From HMRC's perspective, proper documentation matters – but even with informal arrangements, families often find themselves in complicated situations.

How does gifting reduce inheritance tax?

When you gift money to your children, the inheritance tax treatment changes fundamentally.

If you live seven years after making the gift, it's completely outside your estate for inheritance tax purposes. The money is gone in the best possible way.

If you die within seven years, the gift still counts towards your estate. Taper relief exists, but it's narrower than many people believe: it only reduces the tax on gifts above the £325,000 nil-rate band, and only once you've survived at least three years. Most family gifts sit below that threshold, so there's usually no separate tax on the gift itself, instead the gift uses up your allowance first, which can increase the tax on the rest of your estate. Tax treatment like this depends on your individual circumstances, and the rules can change over time, which is part of why plans need reviewing regularly.

The real prize is the seven-year clock. By gifting rather than loaning, you start that clock ticking. A loan never starts it at all.

A real-world scenario

Let's imagine someone who has over £1 million in assets and a generous pension. Their daughter needs help buying a larger house to accommodate them moving in with her family.

The question: should they loan her the money or gift it?

In this situation, they don't need the money to be returned. Their pension would more than cover any care costs if needed. And from 6 April 2027, most unused pension funds will count as part of the estate for inheritance tax, so wealth left sitting, whether in savings or in a pension, eventually faces a substantial bill.

The answer: gift it. Give yourself the chance of living seven years rather than guaranteeing the money stays in your estate.

When loans might make sense

There are situations where maintaining the structure of a loan serves a purpose beyond the financial.

Some parents want their children to understand the value of repayment, particularly when multiple children are involved and fairness between siblings matters.

One creative approach I've seen work well: the child makes repayments on the "loan," but those repayments go into a trust for grandchildren rather than returning to the parents' estate.

This maintains the lesson about financial responsibility whilst still achieving estate planning objectives. The money moves down a generation without coming back into the parents' taxable estate.

Trusts are not regulated by the Financial Conduct Authority.

The documentation question

Whatever approach you choose, documentation matters.

If you're genuinely making a gift, keep records of what you've transferred and when. This protects your inheritance tax planning and ensures your family understands your intentions.

If you structure it as a loan but never expect repayment, understand that you're creating potential complications for your estate whilst gaining no inheritance tax benefit.

To navigate this successfully, be clear about your intentions from the start.

The timing advantage

Parents helping adult children are often in their 50s and 60s – exactly the window when inheritance tax planning creates maximum benefit.

You're making these substantial transfers anyway. Your children need help with deposits, renovations, or getting established. Structuring that support in a way that serves your estate planning objectives alongside your children's immediate needs makes strategic sense.

Making the decision

Whether to loan or gift money to your children depends on several factors:

•   Your overall financial position. Do you need (or want) the money returned?

•   Your family dynamics and values. How important is it that children "repay" what they receive?

•   Whether you have multiple children with different financial needs and how you want to balance fairness.

•   Your inheritance tax position and whether strategic gifting would create meaningful benefit.

The key is understanding the implications before you act, not discovering them years later when options have narrowed.

Ready to explore your approach?

If you're considering financial help for your children, or you've already provided loans that might need restructuring, understanding the inheritance tax implications creates clarity about your best path forward. The earlier you address these questions, the more options remain available. I work with families across Weston-super-Mare, Bristol and North Somerset.

Get in touch to arrange a 45-minute Family Wealth Strategy Call where we can discuss your specific situation.

Frequently asked questions

Do I pay inheritance tax on money I've loaned to my children?

An outstanding loan to your child counts as part of your estate for inheritance tax, because it's a debt owed to you. That applies however informally the loan was made, although proper documentation avoids complications for your family.

What is the seven-year rule for gifts?

If you live for seven years after making a gift, it falls completely outside your estate for inheritance tax. If you die within seven years, the gift still counts, and it uses up your £325,000 nil-rate band before the rest of your estate.

How does taper relief work?

Taper relief reduces the inheritance tax on a gift when you die between three and seven years after making it – but only on gifts above the £325,000 nil-rate band. Gifts below that threshold carry no tax of their own, so taper relief doesn't apply to them. As with all tax rules, the detail depends on your circumstances and can change.

Will my pension be subject to inheritance tax?

From 6 April 2027, most unused pension funds and death benefits will count as part of your estate for inheritance tax. Until then, most pensions sit outside it. This change makes lifetime gifting decisions more significant for families with larger pensions.

About the author

Laura Joyce is a financial planner specialising in comprehensive financial strategies for professionals and families in Weston-super-Mare, Bristol and across North Somerset. With expertise in inheritance tax planning, intergenerational wealth, and strategic financial management, Laura helps clients create clarity, confidence, and balance in their financial lives.

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.