We all want the best for our families and the security of a home of your own has long been a foundation of sound peace of mind: knowing you have the constancy of a roof over your head.
Rising property prices have proven to be a double-edged sword. While older generations have benefited in terms of total wealth, frozen inheritance tax thresholds have meant much of this wealth being dragged into a 40% tax bracket. That’s why estate and legacy planning are more important than ever. Gifting money to family members can not only help and support them, it can also play a strategic role in reducing future IHT liabilities. But understanding the tax implications is essential.
The housing affordability crisis shows no signs of abating
Younger buyers face significant affordability challenges. House prices as a multiple of average earnings have become a major issue for first-time buyers since the start of the new millennium. Although they have dropped back from the all-time high of 7 times earnings in 2022, it is still close to 5.5 times.
According to the government’s English housing survey 2023-24, it means mortgage payers spend up to 54% of their household income on their mortgage. Rising house prices are making help from families increasingly necessary. Indeed, a recent Institute for Fiscal Studies report found that almost half of first‑time buyers in their 20s received an average of £25,000 in financial help from their families.
How a family’s fortunes could support a family’s future
At the same time, the freezing of IHT thresholds until 2030 has drawn more estates into the tax net. The £325,000 nil‑rate band and the £175,000 residence nil‑rate band remain unchanged, meaning rising asset values – especially property – push more families above the threshold. Against this backdrop, gifting money to family while you are still here to see the benefits (called “lifetime gifting”) has the potential to ease housing pressures for family members while simultaneously managing potential IHT liabilities down the line.
How to think about inheritance tax and the housing ladder
When we think about inheritances, we’re often referring to post-death events. But there are ways for parents and grandparents to pass on parts of their wealth while they are still alive and reduce the potential IHT liability of their estates.
For example, a lump‑sum deposit is the most direct way to help a family member buy their first home. Most people are aware of the “seven-year rule”, known as Potentially Exempt Transfers (PETs). Anyone can make any number of lump sum gifts during their lifetime, and if they live another seven years, the gift falls outside their estate and is exempt from inheritance tax. Even if these gifts are made less than seven years before your death, taper relief can reduce the inheritance tax due on the gifts from year three onwards using a sliding scale, if the gift exceeds the available nil rate bands.
Beyond PETs, in the UK, you can make several tax-free gifts each tax year that can reduce your taxable estate without waiting seven years. However, while still helpful, these are relatively small gifts compared to the total sums needed for homeownership.
- Annual Exemption: You may gift up to £3,000 per tax year without it forming part of your estate. You can also carry forward unused allowance from the previous tax year, potentially gifting £6,000 in a single year.
- Small Gifts Allowance: You can gift up to £250 per recipient per year.
- Wedding and Civil Partnership Gifts: Gifts of £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else.
You could reduce IHT by contributing to mortgage payments
Another useful piece of inheritance tax planning available to everyone is something called “gifts out of surplus income”, which could be used to contribute to monthly mortgage payments. You can make as many gifts out of surplus income as you like, but there are a couple of conditions.
The first is they must be part of your normal spending. Setting up a direct debit or standing order to pay out a fixed sum per month satisfies this rule. This could be paid directly to the mortgage account, or to the mortgagee.
The second is that these payments must genuinely be from your income after all your essential spending is taken care of. If you have to dip into your savings or investments to meet the payments, they would be regarded as having come directly from your capital. This means they potentially remain part of your estate and subject to the seven-year rule. Follow this link to find out more about how inheritance tax works.
Taking a longer-term view to help your family get on the housing ladder
You can also use the gifts out of surplus income rule to help build a nest egg for the future. The best way to do this is to pay into an Individual Savings Account in the name of the recipient.
- If they are under the age of 18, a Junior ISA (“JISA”) can give them a good start in life however they want to use the money. Friends and family can pay in up to £9,000 a year and when they turn 18, it converts to a traditional Stocks & Shares ISA. You can find out more about how JISAs work in this article.
- The most flexible option if they are over 18 is a flexible Stocks & Shares ISA. You can invest up to £20,000 a year and all income and growth within the account is tax free. All withdrawals are tax free, too. This article explains why it’s important to find a provider that offers a flexible ISA.
- If they are over the age of 18, you could also consider contributing to a Lifetime ISA (“LISA”). This is designed to help with the deposit on a first-time home with a value of up to £450,000. You can only pay in £4,000 a year but the government adds a 25% bonus. However, if the money is not used as a deposit, it cannot be touched until the holder reaches the age of 60. The government is currently reviewing how effective LISAs are, so the rules might change in the future.
To maximise returns and minimise risk, you should ideally hold a well-diversified portfolio spread across the major investment types to reduce the ups and downs of investing (“volatility”) without limiting the potential for a reasonable long-term return.
Can I use equity release to help with a deposit?
Equity release, or later-life mortgages, are becoming ever-popular ways of releasing equity in your home to help the family with major expenses. But remember, you have to pay back the sum released, plus the added interest. The negative effect of compounding interest will affect the final value of the debt, and there could still be inheritance tax to pay if you do not survive the gift by more than seven years. It could also potentially reduce the RNRB available to you.
Can I gift a property to a family member?
Gifting property can trigger complex tax consequences. If you gift your main residence but continue living in it rent free, HMRC treats this as if it’s still part of your estate despite the transfer. This can result in unexpected IHT bills.
If you hold a property portfolio and would like to pass part or all of it to the next generation it could trigger an immediate personal capital gains tax (CGT) charge. HMRC treats such transfers as if the property were sold at market value, which means a substantial CGT bill unless reliefs apply.
Balancing help getting on the property ladder with your personal financial security
Although gifting can be tax efficient, families should make sure such generosity does not undermine their own standard of living. As financial planning experts, we know from experience that retirees often underestimate the impact of large lump‑sum gifts on their own cash flow, especially after recent economic volatility. Adjustable gifting over several years can provide flexibility and help preserve personal financial security.
Supporting family while reducing IHT could be a win-win for everyone
Helping children or grandchildren onto the housing ladder can be both emotionally fulfilling and financially strategic. By acting early, using annual allowances, and understanding the seven‑year rule, families can significantly reduce future IHT liabilities. However, because rules are complex and individual circumstances differ, professional advice is essential before making major gifts.
Talking to a financial expert can help you navigate the complexities to create a plan suited to your precise needs. They’ll get to know your aims and ambitions and develop a deep understanding of your current situation. From this, they’ll help you create a strategy that gives you the pleasure of seeing your family benefit from your legacy while you’re still alive without compromising your own future wellbeing.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
Junior Stocks & Shares ISA
Save for your child’s future with our tax-efficient Junior Stocks & Shares ISA and give them a financial head start. Shelter up to £9,000 per year.
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