Passing wealth to the next generation turns on residence and timing

The question families ask, and the one that settles the outcome

Passing wealth to the next generation is decided by two facts before it is decided by any structure: where the family is tax resident and when the transfer is made. The first question a family asks, though, is almost always about the vehicle.

A trust or a family investment company, a foundation in the UAE, a holding company somewhere quiet. Over the years I have been asked to choose between those instruments more times than I can count, and the honest answer is that the choice matters far less than the two things nobody opens with. Get the residence and the timing right and almost any competent structure will hold. Get them wrong and the finest deed ever drafted will not save a single pound of the charge.

These notes, like the others in this series, are written mostly for the families we already act for, as a way of setting down in one place the reasoning we return to when the subject comes up over a long table. There is a great deal of talk at present about the transfer of wealth now passing between generations, most of it pitched at a scale that flatters everyone and helps no one.

The useful version is smaller and more precise. It is about how a particular family, with a particular residence position and a particular set of assets, moves what it has to its children without handing 40% of it to a revenue authority on the way. That is a question of law and sequence, not of marketing, and it has clear answers.

Wealth passes through the estate, the gift or the structure

There are only three ways wealth reaches the next generation, and each is taxed differently: it passes on death through the estate, during life as a gift, or through a structure that holds it across the generations. Almost every plan is some combination of the three, and most of the expensive mistakes come from treating one of them as if it were another.

The estate route is the default and the most heavily taxed. Whatever a person still owns at death forms their estate, and under section 7 of the Inheritance Tax Act 1984 it is charged at 40% on the value above the nil-rate band of £325,000. A residence nil-rate band of a further £175,000 is available where a home passes to children or grandchildren, so a single person leaving a home to descendants can pass up to £500,000 free of the charge, and a surviving spouse who inherits the first estate can combine both allowances to pass up to £1 million.

All three figures, the £325,000, the £175,000 and the £2 million threshold at which the residence band begins to taper away, are fixed until 5 April 2031, which means that as asset values rise the reach of the charge widens every year without a single rate changing. The rate falls to 36% where 10% or more of the net estate is left to charity, which is a genuine planning point for the philanthropically minded and irrelevant to everyone else.

The gift route is the cheapest, and the least used well. A gift made during life can leave the estate entirely, and the mechanics of that are the subject of the next section. The structure route, the trust or the company or the foundation, does not itself pass anything to anyone. It holds wealth in a form that can be governed and handed down over time, and whether it saves tax at all turns on a question that has nothing to do with the structure and everything to do with the person who settled it.

The seven-year clock is the cheapest transfer in the system

A lifetime gift to a child or grandchild is free of UK inheritance tax if the person making it survives seven years, under the potentially exempt transfer rules in section 3A of the Inheritance Tax Act 1984. This is the single most valuable mechanism in the code for passing wealth down, and it is quietly powerful precisely because it is unglamorous. There is no structure to draft and no annual charge to pay. There is only a gift, a clean break, and time.

The break has to be genuine. Where the person giving something away continues to enjoy it, the gift with reservation of benefit rule in section 102 of the Finance Act 1986 treats the asset as never having left the estate, so the classic error, giving the house to the children while continuing to live in it rent-free, achieves nothing at all for inheritance tax. The gift counts only if the donor lets go in substance as well as on paper.

Around the seven-year gift sits a set of smaller exemptions that are worth using every year rather than saving for a grand gesture. Each person has an annual exemption of £3,000, which can be carried forward one year if unused; small gifts of up to £250 to any number of different people; larger gifts in consideration of marriage, of £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else; and, most underused of all, the exemption for normal expenditure out of income, which allows regular gifts of genuine surplus income, made as a settled habit and without cutting into the giver's own standard of living, to leave the estate immediately and without waiting seven years. For a family with strong income and patient intentions, that last exemption moves more wealth over time, and more quietly, than any single large transfer.

Taper relief is where good intentions meet bad advice. Taper relief reduces the tax payable on a gift made between three and seven years before death, on a sliding scale, and it does not reduce the value of the gift itself. Its more important limitation is that it only applies once the cumulative gifts in the seven years before death exceed the nil-rate band. A person who gives a child £200,000 and dies four years later has made a gift within the £325,000 band, so there is no tax to taper and the taper relief that the family was counting on was never in play.

Taper matters only for the larger giver whose gifts have already used the band, which is a smaller group than the advice suggests. The mechanics of who then pays, and how the gift interacts with the estate, are set out on the government's own guidance, and the practical lesson is simple: the relief people plan around is often relief they will never touch, while the seven-year survival that they treat as a formality is the thing that actually does the work.

Residence decides whether the structure shields anything

No structure shields a long-term UK resident from inheritance tax on worldwide wealth, because since 6 April 2025 the charge follows residence rather than domicile. This is the change that has quietly rewritten every generational plan built before it, and it is the reason the vehicle question is the wrong place to start. An individual who has been UK resident in 10 of the previous 20 tax years is a long-term UK resident under section 6A IHTA 1984, and while that status holds their worldwide estate is within the charge, wherever the assets sit and whatever holds them. The full mechanics of the test, and of the three-to-ten-year tail that follows departure, are set out in the long-term resident IHT tail analysis.

What this does to the three fashionable structures is worth stating plainly, because the marketing rarely does. A discretionary trust settled by a long-term resident falls into the relevant property regime under the Inheritance Tax Act 1984, which brings a 20% entry charge on value above the nil-rate band, a 6% charge on every ten-year anniversary, and exit charges when property leaves.

A family investment company does not carry those trust charges, but it carries its own: it pays corporation tax on its income and gains inside the company, the founder's shares remain in the founder's estate, and money taken out is taxed again on the shareholder. The two are compared in detail in the family investment company and trust analysis, and the three-way choice between a company, a UK trust and a UAE foundation is set out in the decision-layer analysis. The point that unites them is not their differences. It is that none of the three removes the charge for a settlor who is a long-term UK resident, because the charge attaches to the person, not to the wrapper.

This is why residence is the first decision and the structure is the last. Where the person settling the wealth is outside long-term resident status, a trust holding foreign assets can still be excluded property and a genuine shield, and the structure earns its keep. Where the person is a long-term resident, the same structure is a governed way of holding assets that are fully within the charge, which is often still worth having for control and succession, but is not a tax shield and should never be sold as one.

The promise that a trust or a foundation removes inheritance tax from wealth passed to children is, for a long-term resident, simply untrue, and the families most often sold that promise are the ones with the most to lose from believing it. The distinction between the protection a structure really offers and the tax result it does not is examined further in the asset protection and dynasty trust analysis.

The corridor removes the tax the UAE never charged

The UAE imposes no inheritance, estate or gift tax, so the wealth itself is untaxed there, but relocating to it does not end the UK charge and it does not, by itself, decide who inherits. This is the most attractive and the most misunderstood feature of the corridor for a family thinking about the next generation. There is no equivalent in the UAE of the 40% charge, no death duty and no tax on giving assets to children, and for a family that has genuinely broken UK residence that absence is real and valuable.

The catch is the tail. A person who leaves the UK carries their long-term resident status with them for a further three to ten tax years, depending on how long they were resident, and dies within that window with their worldwide estate still inside the UK charge, wherever they and the assets now are. A UAE address does not switch the charge off; it starts a clock. The interaction between that tail, the exit year and any liquidity event is the substance of the pre-exit year analysis, and it is why relocating for the next generation's benefit is a matter of timing rather than of arrival.

The second point is succession rather than tax, and it catches families who assume that no death duty means no problem. A non-Muslim who dies in the UAE without a registered will has their local estate distributed by statutory default under Article 11 of Federal Decree-Law No. 41 of 2022, which gives 50% to the surviving spouse and 50% to the children, regardless of what the family's own plan intended. A registered will through the DIFC Wills Service or the Abu Dhabi Civil Family Court replaces that default with the family's chosen distribution, and the choice of route and its coordination with a UK will is the subject of the DIFC and ADGM wills analysis.

A family that elects the law of a civil-law home country instead should know that many such jurisdictions impose forced heirship, reserving fixed shares for children whether the parent intended it or not, so the escape from one default can lead straight into another. Passing wealth cleanly in the corridor means holding two things at once: the UK tax position, which the move only slowly releases, and the UAE succession position, which the move does not settle at all until a will is signed.

The pension route that closes in 2027

From 6 April 2027 unused pension funds fall within a person's estate for inheritance tax, closing one of the last routes that passed wealth to the next generation untaxed. For years a defined-contribution pension left undrawn was among the most efficient things a person could bequeath, sitting outside the estate and passing to the next generation free of the 40% charge.

That advantage ends. Once unused pension funds are inside the charge, the calculus of what to spend, what to give and what to leave changes for a large number of families, and the pensions that were quietly earmarked for the children become part of the taxable estate like everything else. The mechanics and the corridor implications are set out in the pension IHT analysis, and the broader question of what is worth doing before a Budget confirms or extends such changes is addressed in the pre-Budget corridor analysis. The practical effect for generational planning is to push weight back onto the two decisions that survive every reform: where the family is resident, and how early the seven-year clock is started.

A map of the routes

The table sets out the routes wealth actually takes to the next generation, what passes by each, the cost, and the fact that decides the outcome, so the choice is visible rather than sold.

Reading down the final column is the whole argument in miniature. Four of the five routes are decided by residence or by timing, and only one, the family investment company, turns partly on drafting. The vehicle in the left-hand column is where families start; the fact in the right-hand column is where the outcome is actually settled.

The vehicle is not the plan. The sequence is

Because residence sets whether wealth is taxable and timing sets how much, the order of the decisions matters more than the vehicle that ends up holding the assets. The sequence that works is always the same, and it is the reverse of the order in which families usually approach it. Residence comes first, because it decides whether anything can be sheltered at all and whether the move to the UAE has released the UK charge or merely started the tail. The seven-year clock comes second, because the earlier it is started the more it carries, and every year of delay is a year of exposure that no later structure can buy back. The structure comes last, chosen to fit the residence position and the gifting plan that are already settled, not asked to rescue them.

Families that get this right are rarely the ones with the cleverest arrangement. They are the ones who accepted that the arrangement is the smallest part of the decision, and who did the unglamorous work of fixing the residence position and starting the gifts early, in the right order, with clean records kept as they went. That work is patient and it is quiet, and across the structures I have been handed over the years, assembled a generation at a time by advisers who saw only their own layer, the ones that held were the ones built in that order.

What I set down here draws on the shared judgement of colleagues and partners across our offices in the UAE, the United Kingdom and Ireland, who have spent a long time watching which plans survive contact with a revenue authority and which look immaculate until the moment they are tested. A structure chosen before the residence and the timing are settled is not a plan for the next generation. It is an expensive way of postponing the two decisions that were always going to decide it.

Frequently asked questions

What is the cheapest way to pass wealth to the next generation in the UK?

The cheapest route is a lifetime gift that you survive by seven years. Under the potentially exempt transfer rules in section 3A of the Inheritance Tax Act 1984, an outright gift to a child or grandchild leaves your estate entirely if you live for seven years after making it and keep no benefit from what you gave. Around it sit smaller annual exemptions worth using every year: £3,000 a year, gifts of £250 to any number of people, wedding gifts, and regular gifts out of genuine surplus income, which leave the estate at once. None of these needs a structure. They need only time and a genuine break, which is why starting early matters far more than choosing a vehicle.

How does the seven-year rule on gifts actually work?

A gift you make in your lifetime is free of inheritance tax if you live for seven years after making it, and is brought back into the calculation if you die within that period. If you die within seven years, the gift uses up your nil-rate band first, and only the excess over £325,000 of cumulative gifts is charged. The seven-year survival is the substance of the relief, so the practical rule is to make significant gifts as early as the family can afford, because the clock cannot be started retrospectively and every year that passes reduces the risk that the gift falls back into the estate.

Does taper relief reduce inheritance tax on every gift?

No, and this is the most common misunderstanding in generational planning. Taper relief reduces the tax on a gift made between three and seven years before death, on a sliding scale, but it only applies once your cumulative gifts in the seven years before death exceed the £325,000 nil-rate band. It also reduces the tax, not the value of the gift. A gift that sits within the nil-rate band carries no tax in the first place, so there is nothing for taper to reduce, and families who plan around taper on modest gifts are relying on a relief that will never apply to them.

Can a trust or family investment company remove inheritance tax on wealth passed to children?

Not for a long-term UK resident. Since 6 April 2025 a person resident in 10 of the previous 20 tax years is within UK inheritance tax on their worldwide estate under section 6A IHTA 1984, and a trust, a family investment company or a foundation settled by such a person is taxed at full UK rates. A trust falls into the relevant property regime with its 20% entry and 6% ten-year charges; a company pays corporation tax inside and leaves the founder's shares in the estate. These structures are worth having for control, governance and succession, but for a long-term resident they hold wealth that is fully within the charge rather than sheltering it, and any adviser who sells them as a way to remove the tax is mis-selling them.

Do I still pay UK inheritance tax on wealth passed to my children if I move to Dubai?

For a period, yes. Leaving the UK does not end inheritance tax on your worldwide estate immediately, because long-term resident status persists as a tail of three to ten tax years after departure, depending on how long you were UK resident. If you die within that tail, your worldwide estate remains within the UK charge even though you and your assets are in the UAE. The move is valuable for the next generation, but it works through timing rather than through arrival, and the length of the tail is one of the first things to establish before treating a relocation as an inheritance tax solution.

Does the UAE charge any tax on inheritance or gifts to children?

No. The UAE imposes no inheritance tax, no estate tax and no gift tax on individuals, so wealth passed to children is not taxed in the UAE itself. What the UAE does regulate is succession: a non-Muslim who dies without a registered will has their UAE estate distributed by statutory default, 50% to the spouse and 50% to the children under Article 11 of Federal Decree-Law No. 41 of 2022, regardless of their own wishes. Registering a will through the DIFC Wills Service or the Abu Dhabi Civil Family Court replaces that default with your chosen distribution, so the UAE question is who inherits and under which will, not how much tax is charged.

What happens to my pension as a way of passing wealth to my children?

From 6 April 2027 unused pension funds fall within your estate for inheritance tax, which ends their long-standing advantage as a tax-free bequest to the next generation. A defined-contribution pension left undrawn used to pass outside the estate and free of the 40% charge, which made it one of the most efficient assets to leave to children. Once it is inside the charge, the decision about what to spend, what to give away in life and what to leave becomes a live one again, and pensions that were quietly earmarked for the children should be reviewed against the seven-year gifting route rather than assumed to pass untaxed.

Should I set up a trust for my grandchildren to avoid inheritance tax?

Only if you are outside long-term UK resident status, and rarely as a way to avoid the tax rather than to govern the money. A trust settled by a long-term resident falls into the relevant property regime, so it carries its own inheritance tax charges rather than escaping them, and for that person a well-timed programme of outright gifts under the seven-year rule usually passes more to grandchildren at less cost. A trust earns its place where the beneficiaries are young or vulnerable, where the family wants a class that admits future grandchildren automatically, or where the settlor is not a long-term resident so foreign assets can still be excluded property. The label is not the question; your residence and the reason you want a trust are.

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Critical advisory. Passing wealth to the next generation is decided by the interaction of your residence, the timing of your gifts and the structure that finally holds what remains, in that order, and the figures and reliefs described here apply differently to every family depending on where they are resident, how long they have been resident, what they own and when they act.

Whether a gift will fall outside your estate, whether a trust or company shelters anything or merely governs assets already within the charge, whether a relocation has released the UK position or started the tail, and how a UAE will interacts with a UK one, all turn on facts specific to you. Establishing the residence position, starting the seven-year clock in the right order and choosing a structure that fits rather than one that is sold is work we do in-house across the UAE, the United Kingdom and Ireland, for families whose plans are meant to outlast them.

If you are planning to pass wealth to your children or grandchildren, take advice on your own facts before you gift, settle or move, because the order of these decisions is far harder to correct after the event than before it. This article is general information and not legal, tax or financial advice, and your own position should be confirmed against your specific facts before you act.