Think Before You Gift: Inheritance Tax Risks on House Deposits

At Scullion LAW, we understand the joy that comes from helping children or grandchildren onto the property ladder. Many families want to give a lump sum towards a house deposit, and we see how meaningful that support can be. But we also know that without the right planning, a generous gift could lead to an unexpected Inheritance Tax (IHT) bill if the giver passes away within seven years.

Understanding IHT and Gifted Deposits

When you gift a deposit – money given by a parent or close relative to help with a house purchase – it’s usually treated as a Potentially Exempt Transfer (PET) for Inheritance Tax purposes.

If you survive for seven years after making the gift, it typically falls outside your estate and is free from Inheritance Tax. However, if you pass away within that period, the gift could still be taxed – potentially at a reduced rate depending on its size and when it was given.

That’s why we always encourage families to speak to us before making large financial gifts. As Ailidh Ballantyne, our Head of Wills, Powers of Attorney and Estates, explains:

“Gifted deposits can be a useful way to support younger generations into home ownership. But without proper legal advice, families risk facing unexpected tax consequences.”

The Risks of Gifting Without Legal Advice

Gifted deposits can be a fantastic way to support younger generations into home ownership, but without proper legal advice, families risk facing unnecessary tax bills. Gemma Miller, our Director and Head of Property Law, often sees how this catches people off guard:

“Many families simply don’t realise the potential tax consequences. If a parent gifts £50,000 towards a deposit and then passes away within seven years, their estate may end up facing a significant Inheritance Tax charge.”

With property prices and the cost of living continuing to rise, it’s no surprise we’re seeing more families step in to help first-time buyers. In fact, recent research shows that in 2023 parents and grandparents gifted a record-breaking £9.4 billion towards deposits – almost double the £5 billion in 2019 – with the average gift now at £58,000.

Why Clear Documentation Matters

We regularly speak with families who are eager to help but haven’t considered how a gift might affect their estate or what could happen if the arrangement isn’t clearly documented. As Gemma says:

“Without legal advice, families risk unintended tax bills and family disputes. To avoid misunderstandings, we always advise documenting the gift clearly and seeking legal guidance. Doing this isn’t about mistrust; it ensures everyone understands the arrangement and protects their interests, especially when the amounts involved are substantial.”

If you’re thinking about gifting a deposit, we’d be happy to guide you through the process and help you avoid any hidden pitfalls. At Scullion LAW, our priority is to make sure your generosity truly benefits the people you love, without leaving an unexpected bill behind.