Inheritance tax explained for home buyers (including gifted deposits)

What is inheritance tax (IHT)?

Inheritance tax is a tax that may be due when someone dies. It’s based on the value of their estate at the time of death, which can include property, savings, investments and other assets. In some cases, it can also be affected by gifts made during a person’s lifetime.

For many families, IHT isn’t triggered because estates often fall below the relevant allowances. However, if you’re relying on family support—such as gifted money towards a deposit—it can still be helpful to understand how IHT works in the background.

When does IHT apply?

IHT is only payable on the part of an estate that exceeds the relevant tax-free allowances.

The main thresholds (overview)

Nil-rate band: the starting threshold is £325,000.
Main residence nil-rate band: if the estate includes a home left to direct descendants (children or grandchildren), an additional allowance may apply, potentially bringing the total tax-free amount up to £500,000.
Spouse or civil partner exemption: transfers between spouses/civil partners are generally exempt, and unused allowances may be transferable in certain circumstances.

These allowances can be affected by factors such as who inherits and the value of the home.

How is IHT calculated?

If IHT is due, the tax rate is generally 40% on the value above the available allowances.

In practice, whether IHT is payable depends on:

the total value of the estate
who the beneficiaries are
whether any lifetime gifts are brought back into the calculation
whether any additional allowances apply (for example, the main residence band)

Lifetime gifts and the “seven-year rule”

One of the most important concepts for families is that gifts can be treated as part of the estate for IHT purposes.

The seven-year rule (in plain English)

If a gift is made and the donor dies within seven years, the gift may be included in the IHT calculation.
If the donor survives more than seven years, the gift is usually outside the IHT calculation.

Taper relief (how tax reduces over time)

If death occurs within seven years, the IHT rate can reduce the longer the donor survives after making the gift. This is often described as “taper relief”.

Common ways family support shows up in home buying

Many home buyers receive help from family in the form of:

a gifted deposit
help with fees (such as solicitor or survey costs)
gifts of cash to reduce the mortgage amount needed
in some cases, gifts of property or other assets

From a mortgage perspective, lenders typically want to understand the source of funds and confirm whether money is truly a gift (not a loan). From an IHT perspective, the donor may want to understand how gifting could affect their estate.

How gifted money can interact with inheritance tax

A gifted deposit is often a straightforward way to help a family member buy a home. For IHT, the key question is whether the donor made the gift with no expectation of repayment and whether the donor dies within the seven-year window.

Why the timing matters

If the donor dies within seven years of making the gift, the gift may be brought back into the IHT calculation (subject to the rules and allowances that apply). If they survive beyond seven years, the gift is generally treated as having fallen outside the IHT calculation.

Why “how” the gift is made can matter

Some gifts are treated differently depending on the circumstances. For example:

annual exemptions: small gifts may be covered by exemptions
wedding gifts: specific exemptions can apply in certain situations
charitable giving: can be exempt and may affect the overall IHT position

Because the details can be technical, it’s often sensible for families to consider getting professional tax guidance where significant sums are involved.

Gift with Reservation of Benefit (GROB): a key risk to understand

A common misunderstanding is that you can gift a property and still keep using it without consequences. In IHT terms, there is a concept called Gift with Reservation of Benefit (GROB).

What GROB generally means

If someone gifts an asset but continues to benefit from it, HMRC may treat the gift as still effectively part of the donor’s estate for IHT purposes.

Why this can affect home-related decisions

If a parent gifts a home to a child but continues to live there, or retains a benefit that HMRC considers significant, it may not achieve the intended IHT outcome.

GROB can also create knock-on issues for the child’s plans, including how the property is used and whether it affects mortgage arrangements.

If you’re receiving help: what to consider alongside IHT

Inheritance tax planning is separate from mortgage underwriting, but the two can overlap in real life—especially when family wealth is involved.

Mortgage lenders and gifted deposits

When money is gifted towards a purchase, lenders usually require evidence that:

the funds are genuinely a gift (not repayable)
the source of the funds is clear
the buyer can meet affordability requirements

Even if IHT is not expected to be payable, the lender’s requirements still need to be met.

Renting out after a gift (why it can be sensitive)

Where a gifted arrangement involves property (rather than cash), the way the property is used can be relevant. Some residential mortgages have restrictions around letting. If a plan involves renting out, it’s important to check the mortgage terms early so the arrangement doesn’t create avoidable complications later.

Practical examples (high level)

Example 1: Gifted deposit from a parent

A parent gifts part of the deposit for their child’s home purchase. For IHT purposes, the gift may be considered in the donor’s estate if they die within seven years, subject to exemptions and the taper rules.

Example 2: Gift of a home but continued occupation

A parent gifts their home to a child but continues to live there. This can raise GROB concerns, which may mean the gift doesn’t remove the property from the donor’s IHT calculation as expected.

Paying IHT: who deals with it?

If IHT is due, it’s typically handled by the person administering the estate (for example, an executor if there is a will). The estate may need to settle any IHT bill before distributing assets to beneficiaries.

If the estate doesn’t have enough cash, assets may need to be sold or other arrangements considered.

Key takeaways for home buyers

IHT is about the value of an estate at death, but lifetime gifts can be relevant.
The seven-year rule is central: gifts made within seven years may be included in the IHT calculation.
Taper relief can reduce the IHT rate if death occurs within the seven-year window.
GROB is a major consideration when gifting property while still benefiting from it.
Even when IHT isn’t expected to be an issue, gifted deposits still need to meet mortgage lender requirements.

Where to go next

If you’re planning a purchase with family support, it can help to align three things early:

the mortgage lender’s expectations around gifted funds
the donor’s understanding of how gifts may be treated for IHT
the intended use of any gifted property (especially if letting is involved)

That way, the financial plan stays coherent from both a mortgage and a wider wealth perspective.

Authoritative guidance: For official information on inheritance tax, see GOV.UK: https://www.gov.uk/inheritance-tax