Bank of mum and dad: what the inheritance tax rules mean for family gifts

Why this matters for older homeowners

The “Bank of Mum and Dad” has become a structural feature of the UK housing market. Research consistently shows that a significant proportion of first-time buyers receive financial help from family — whether as an outright gift toward a deposit, a loan with informal repayment terms, or a more formally structured contribution. For homeowners aged 55 and over, releasing equity from a property is one of the routes through which that help can be provided.

But the question of how a gift or loan affects an estate for inheritance tax purposes is not always well understood. Inheritance tax applies only to a relatively small share of UK estates — roughly 1 in 20 — but that proportion is meaningfully higher among homeowners with substantial property wealth, where the combination of the property value and other assets can push the total estate above the nil-rate band thresholds.

The 7-year rule: how gifts leave the estate

When a person makes a gift during their lifetime, it is treated as a potentially exempt transfer (PET) for inheritance tax purposes. The key rule is that if the donor survives for seven years from the date of the gift, it falls completely outside the estate and no inheritance tax applies to it, regardless of its value.

If the donor dies within seven years of making the gift, the position is more complex and depends on whether the total value of gifts in the seven years before death exceeds the nil-rate band. If the gifts stay within the nil-rate band (£325,000, though it can be higher with certain reliefs), there is no inheritance tax on them. If they exceed it, the excess is subject to inheritance tax at 40% — though taper relief can reduce the rate if death occurs between three and seven years after the gift:

• 3 to 4 years after the gift: tax rate reduced to 32%
• 4 to 5 years: reduced to 24%
• 5 to 6 years: reduced to 16%
• 6 to 7 years: reduced to 8%
• After 7 years: no tax

It is worth noting that taper relief reduces the tax rate on the excess above the nil-rate band, not the full gift value. If the total gifts are within the nil-rate band, taper relief is irrelevant because there is no tax to reduce. The relief only becomes material where gifts are substantial enough to exceed the available threshold.

Gift versus loan: a different IHT treatment

Some parents structure their financial help as a loan rather than an outright gift — partly to retain some claim over the funds if circumstances change, and partly because a loan sits differently in the estate than a gift does. A genuine loan to a child remains an asset of the estate (it is a debt owed back to the parent), so it does not reduce the estate value in the way an outright gift would.

The important point is what happens if a loan is later waived. If a parent formally forgives or writes off a loan, that waiver is treated as a gift from the date of the waiver — not from the date the original loan was made. The seven-year clock starts again from the moment the waiver takes effect. This is a detail that is easy to overlook but can have material consequences if the waiver happens late in the parent’s life.

Protection mechanisms: declarations of trust and loan documentation

A separate concern for parents contributing to a property purchase — whether as a gift or loan — is protecting that contribution if the child’s relationship with a partner later breaks down. Property purchased by a couple is typically treated as joint assets in a separation, and an informal gift to a child may be treated as part of the couple’s shared property unless it is formally documented.

A declaration of trust can record that a specific portion of the property’s equity belongs to the parent (or to the child alone, separately from the partner). A loan agreement can similarly document the terms of a parental contribution and support a claim to repayment if the property is sold. Neither of these arrangements prevents the contribution from occurring — they simply provide a legal record of the basis on which it was made.

These are legal arrangements and the specifics need to be handled by a solicitor familiar with property and family law. The point here is simply that informal arrangements — where a parent transfers money to a child with no documentation — offer the least protection to both parties if something goes wrong.

Releasing equity to help family

For homeowners who want to help adult children with a deposit but do not have accessible cash savings, releasing equity from their current home is one way to make funds available. The equity release route does not require selling the property or making monthly repayments; instead, the amount released plus any interest that accumulates is repaid when the property is eventually sold, typically when the homeowner moves into long-term care or passes away.

Understanding how a release of equity interacts with the estate — including how it affects what is eventually left to beneficiaries — is part of thinking through whether this approach makes sense. For more on how equity release works, see our guide to what is equity release. For how equity release and inheritance planning interact, our guide to equity release and inheritance tax covers the key considerations.