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Derin Clark

Online Reporter
Published: 04/08/2021
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As house prices continue to rise, saving for a house deposit is becoming increasingly challenging for many would-be homeowners, resulting in parents and grandparents gifting money to help towards the deposit.

Along with helping first-time buyers onto the property ladder, gifting money towards the deposit often means that grandparents and parents are giving away part of their childrens’ inheritance early, which helps to reduce the overall assets they leave behind and, as a result, reduce the potential Inheritance Tax that will have to be paid.

Tax implications of gifting deposits

In general, under the current tax rules, estates valued at a minimum of £325,000 – which includes all the assets a person leaves behind after they die including property and savings after debts and funeral costs have been deducted – have to pay up to 40% in Inheritance Tax. If, however, the person gifts some of their estate early, the overall asset value in the estate is reduced, which can either take it under the £325,000 threshold or, at least, reduce the amount of Inheritance Tax that needs to be paid. Inheritance Tax is not paid on the gifted money if the person making the gift lives for over seven years; if they die before then, however, the person receiving the gifted money could be liable to pay Inheritance Tax. Read our guide on Inheritance Tax for more information about Inheritance Tax and how much heirs have to pay.

How to gift a deposit

For grandparents and parents who want to help loved ones to buy their first home, there are several options available that will enable them to gift a deposit.

A good way can be to use savings, although those considering this option may want to keep in mind that they should keep an emergency savings fund available in case they have to pay for unexpected events or have to deal with a sudden fall in income. Those who are retired may want to be particularly cautious about using savings as they may find it harder to replace money used from a savings account without a regular employment income.

Another popular option is to release equity built up in their home, which can be a good way of passing on inheritance to loved ones, especially as many older homeowners have benefited from the increase in property prices. Downsizing can be a good way of releasing equity, especially for those close to retirement or who have already retired and whose children have already left home. Downsizing to a smaller and cheaper property can not only help free up money that can be gifted towards a deposit, but can also help to reduce household bills which can reduce everyday living costs.

An option for homeowners who do not want to downsize and who are aged 55 or over is to release equity from their home through equity release. Rates on equity release have been falling over the last five years and are comparatively low at the moment. Meanwhile, the number of deals available in the market has increased in recent years, which has resulted in a growth in deals offering flexible features such as the ability to payback some interest or make partial repayments. Overall, this has made equity release much more attractive to some homeowners; however, those thinking about taking this option should keep in mind that equity release still has a long-term impact on finance and, in particular, the value of the inheritance they leave behind. As such, homeowners should speak to an independent financial advisor before taking equity release to be certain it is the best option for them.

Free independent financial advice

Whatever option you are thinking of taking to gift a deposit for your child or grandchild, it may be worthwhile speaking to an independent financial advisor first to discuss your circumstances and possible alternatives. readers with £100,000 or more in savings and investments can get a one hour free consultation with award-winning independent financial planners Kellands. More information about Kellands and this offer can be found here.

Alternative ways to help first-time buyers

Grandparents and parents who want to help a grandchild or child to buy their first home but who do not want to gift money towards a deposit can consider a guarantor mortgage instead.

A guarantor mortgage allows a first-time buyer to purchase a home with a very small deposit, and sometimes without a deposit at all. In return, a parent or grandparent puts an asset, which is usually their home but for some deals can be savings, as a guarantee against the mortgage. This can be a risky option as it means that if the first-time buyer is unable to keep up with mortgage repayments the guarantor risks losing their asset, which could result in them losing their home. Although a guarantor mortgage can be a good way of helping loved ones onto the property ladder, due to the risks involved, it may be worthwhile speaking to a mortgage broker first as, after taking into account the circumstances of the situation, a broker may be able to suggest alternative options.


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