Think before you gift — inheritance tax and importance of seeking legal advice

Beware the inheritance tax risks on gifted deposits, say Scullion LAW’s Ailidh Ballantyne and Gemma Miller.

With property prices and the cost of living continuing to rise, many families are choosing to step in and help younger generations onto the property ladder. One of the most common ways of doing so is by gifting a sum of money towards a house deposit.

While such gestures are generous and often essential, they can carry legal and financial consequences that are not always well understood. In particular, they may give rise to unexpected inheritance tax (IHT) liabilities if the person making the gift dies within seven years of doing so.

Inheritance tax and gifted deposits

For IHT purposes, a gifted deposit is usually treated as a potentially exempt transfer (PET). If the person making the gift survives for seven years, the sum is typically excluded from their estate. However, if death occurs within that seven-year period, the gift may still fall within the estate and be subject to tax, depending on its size and the time elapsed.

In principle the rules are straightforward, but in practice they frequently give rise to confusion. Families are often unaware of the potential consequences and without proper legal advice, they risk facing an unexpected tax bill.

A growing trend

Recent figures from Twenty7tec illustrate how significant this issue has become. In 2023, parents and grandparents across the UK gifted a record £9.4 billion towards deposits, almost double the £5 billion recorded in 2019. The average gift now stands at around £58,000.

These are substantial sums, with the potential for significant tax consequences. For example, if a parent gifts £50,000 towards a deposit and then passes away within seven years, their estate may end up facing a significant IHT charge.

Documentation and disputes

Tax is not the only risk. Undocumented financial gifts frequently give rise to disputes, particularly where there is later disagreement as to whether the sum was intended as a gift or a loan. Such disputes often surface during separations or following the sale of the property.

Clarity at the outset is therefore essential. Documenting the arrangement is not a matter of mistrust but one of protection: it ensures everyone understands the arrangement and protects their interests, especially when the amounts involved are substantial.

Conclusion

The desire to support younger generations in purchasing a home is both natural and commendable. However, it is essential that families are aware of the potential IHT implications and the importance of clear documentation. With careful planning, the benefits of such generosity can be secured while avoiding unintended financial and relational consequences.

Written by Ailidh Ballantyne, Head of Wills, Powers of Attorney and Estates, and Gemma Miller, Director and Head of Property Law, Scullion LAW.