Understanding the Inheritance Tax implications of gifted deposits

Navigating the modern property market can be difficult for first-time buyers. With house prices on the rise, leading to the requirement for larger deposits, getting one’s foot on the property ladder can be challenging.

By offering a gifted deposit, you could help your child or grandchild buy their first home sooner rather than later.

Gifting money for a house purchase is a common solution, with the Intermediary reporting that 1 in 7 buyers currently rely on financial help from family when purchasing their first home.

While you might want to help as soon as you can, it’s essential to understand the Inheritance Tax (IHT) implications of gifting money for a house deposit.

After all, even a 10% deposit can be significant in today’s housing market.

Here’s what to know about IHT and gifted deposits, so that you can help your loved ones buy their first home.

Many first-time buyers will need at least £30,000 to get on the property ladder

The first-time buyer landscape can be challenging, particularly in today’s economic climate.

Not only are houses more expensive, which often means you need a large deposit, but mortgage interest rates are still high compared to a few years ago. For example, Mortgageable notes that in 2020, the average five-year fixed rate was 2.4%. In 2025, it’s 4.5%.

Calculations from Nationwide highlight the difference.

• A £300,000 mortgage paid over 25 years with an interest rate of 2.4% will cost around £1,330 each month.
• The same mortgage with an interest rate of 4.5% will cost about £1,667.

Keep in mind that lenders consider a buyer's whole financial picture when deciding whether to offer a mortgage, and monthly affordability plays a significant role. If your child or grandchild’s affordability is low due to higher interest rates, the lender may decline their mortgage application.

Regarding deposits, while many lenders will accept 10%, with some even allowing 5% deposits, this can come with increased interest rates and more expensive monthly payments.

And, even with a 5% or 10% deposit, Finder states that the average house price for a first-time buyer in 2024 was £311,034, up 8% from 2022. At 10%, that still requires your child or grandchild to come up with at least £31,000. In London, average house prices can be as high as £511,514, which makes the minimum deposit requirements even higher.

Here, having a larger deposit can help as it could:

• Help reduce monthly payments
• Present better interest rate offers
• Lower the overall mortgage amount.

That’s where gifted deposits come in, as they can offer a major financial boost to your loved ones, helping them realise their dreams of owning their own home without needing to save for decades first.

A gifted deposit may still form part of your estate for Inheritance Tax purposes if you pass away within 7 years

Most of the time, a gifted deposit will be what is known as a Potentially Exempt Transfer (PET). This means that if you survive for seven years from the date of the gift, it will fall outside of your estate for IHT purposes. In other words, your child or grandchild will not need to pay any IHT on the money.

However, if you pass away within this seven-year window, the gift will usually still count as part of your estate, potentially triggering an IHT liability. Normally, if your estate exceeds the current IHT nil-rate band of £325,000 (or £500,000 if you are leaving your home to a direct descendant), IHT will be payable on the excess.

When it comes to PETs, depending on when you made the gift and how much it was, the money may be subject to a reduced rate of IHT. The rate of IHT charged on gifts exists on a sliding scale, called “taper relief”, and the rates applied are shown below.

Keep in mind that your nil-rate band may absorb some or all of the gifted deposit. Finder notes that the average deposit in the UK was 20% of the purchase price, or £61,090. This would fall well below your £325,000 threshold.

This said, your gifted deposit could have implications for other areas of your estate, pushing a larger portion of it over the taxable bracket if you pass away within seven years. So, it’s still worth consulting a financial adviser before handing over a gifted deposit.

Gifting regular amounts of money over time could help reduce an IHT bill

There are other strategies to keep in mind if you want to gift a deposit for a house but are keen to have the money remain outside of your estate for IHT purposes.

Here, you may want to consider taking advantage of your annual exemption and gifting the money over a longer period of time.

Each tax year, you’re permitted to gift up to £3,000 tax-free to anybody, even non-family members. This is known as your “annual exemption”, and gifts within it will usually be considered immediately outside of your estate for IHT purposes.

 Here are some additional considerations:

• If you’re married or in a civil partnership, you can combine your annual exemptions and gift a total of £6,000.
• You can “carry forward” any unused exemption from the previous tax year for a maximum of £6,000 (£12,000 as a couple).
• You may only carry your annual exemption forward for one year.
• You can gift your child £5,000 for a wedding or civil ceremony.
• Grandchildren can receive £2,500 for a wedding or civil ceremony.
• Financial wedding gifts to other people benefit from an allowance of £1,000.

The wedding allowances exist in addition to your annual exemption.

Finally, you can gift up to £250 to as many people as you’d like, as many times as you want, each tax year, as long as the recipient hasn’t also benefited from another financial gift from you.

Spreading out your living inheritance over many years, while keeping gifts within the annual exemption, may help to avoid any IHT being levied on this wealth in future.

Here’s an example. Your child wants to buy a home in the next five years and already has a deposit of £20,000 saved up. By gifting them £3,000 a year until they buy their home, their deposit would rise to £35,000, with no risk of IHT. If you and your partner combined allowances, their deposit could increase to £50,000.

You could also consider gifting funds monthly or annually from surplus income, which carries its own set of rules, but can be IHT-efficient too.

While gradual gifting can be a useful strategy, it’s still a viable option to gift a lump sum as a PET. Just make sure you’ve taken independent advice and are aware of all the options available to you first.

How a financial adviser can help

Seeking professional help could make it easier to navigate the world of IHT while still helping your loved ones. An adviser can provide tailored advice, unique to your circumstances, and help you structure your gifted deposits so that they remain tax-efficient and in line with your overall financial plan.

This is something we at J Edward Sellars can help you with.

Email enquiries@jesellars.co.uk or call 01934 875 919 to find out more about what we can do for you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

The Financial Conduct Authority does not regulate estate planning or tax planning.