The Bank of Mum and Dad tax bill: what older homeowners need to know before gifting

How gifts and inheritance tax interact

Any gift of money from a parent to a child is a potentially exempt transfer (PET) for inheritance tax purposes. This means:

• If the person making the gift survives for seven years after the gift is made, it falls entirely outside their taxable estate — no inheritance tax is due on it
• If the person dies within seven years, the gift may be brought back into the estate and taxed. Taper relief applies between years three and seven, reducing the rate of tax the longer the donor survives
• If the person dies within three years, the full IHT rate of 40% applies to the gift above the nil-rate band (subject to available allowances)

The £3,000 annual gift exemption is separate from the PET rules: up to £3,000 per year can be given away with no inheritance tax consequence regardless of when the donor dies. This allowance can be carried forward by one year if unused — meaning a couple who have not used either year’s allowance could give up to £12,000 in one tax year free of inheritance tax from the outset.

The gift with reservation of benefit trap

One rule that does not apply to straightforward cash gifts, but which is important to understand, is the “gift with reservation of benefit” (GROB) rule. If someone gives away an asset — most commonly property — but continues to benefit from it (for example, continues to live in a gifted house rent-free), the gift is treated as if it was never made for inheritance tax purposes. The asset remains in the taxable estate.

For cash gifts — for example, gifting money to a child to use as a house deposit — this rule does not apply. A straightforward cash gift does not come back into the estate under GROB. The concern for parents who want to help children with property is specifically around giving away the property itself while continuing to live in it, which is a different arrangement entirely.

Care costs: a separate consideration

Inheritance tax is not the only consideration for gifts in later life. Local authorities assessing eligibility for means-tested care funding look back at assets that have been given away when calculating what resources someone has available. If a substantial gift is made within a period that a local authority considers “deliberate deprivation of assets,” the authority may treat the gifted amount as if it were still held. The period assessed varies by authority and there is no fixed statutory rule equivalent to the seven-year IHT clock.

This is not a reason to avoid gifting, but it is a reason to take professional advice on the full picture — particularly for homeowners who may need care in the foreseeable future.

How equity release can help

For homeowners who want to make a substantial gift now but whose wealth is mostly tied up in property, equity release can provide the liquid funds to do so without selling the home. The released funds can be gifted directly to family members, and once given, the seven-year clock begins for inheritance tax purposes — the same as any other cash gift.

The practical advantage of acting sooner rather than later is that the seven-year period starts running earlier. A homeowner who releases equity and makes a gift at 68 has potentially cleared the seven-year period by 75. A homeowner who waits until 75 to make the same gift would see the period run to 82. Age and health affect how material this distinction is — which is precisely why an informed view of the full picture is valuable before making large gifting decisions. For more on equity release as a source of funds for family support, see our guide to equity release and inheritance tax.