Helping children buy: gifting a deposit, equity release, and the seven-year rule

Why families are gifting deposits

The Spring research confirms what many brokers already knew: family financial support has become a structural feature of first-time buyer transactions. With average first-time buyer deposits running above £30,000 and mortgage affordability still constrained by rates, the gap between what a buyer can save and what they need has not closed. Around one in four families who do give deposit help give £10,000 or more.

For older homeowners, the impulse to help often runs up against a practical question: where does the money come from? Those with substantial pension income or savings can draw on those directly. Those whose wealth is concentrated in their property have fewer liquid options — unless they release some of their home’s value.

The seven-year rule and inheritance tax

Cash gifts between individuals are potentially exempt transfers (PETs) for inheritance tax purposes. If the person making the gift survives for seven years after making it, the gift falls outside their estate and no inheritance tax is due on it. If they die within seven years, taper relief reduces the tax due on a sliding scale between years three and seven; if they die within three years, the full IHT rate may apply.

The £3,000 annual gift exemption allows everyone to give away £3,000 per year with no inheritance tax consequence, regardless of when they die. This allowance can be carried forward one year if unused, meaning a couple could give up to £12,000 in a single tax year if neither has used the previous year’s allowance.

For a gift of £11,241 — the average family deposit contribution — the seven-year rule applies to the amount above the annual exemption. If the donor lives for more than seven years, there is no inheritance tax liability on the gift. The key document lenders require to accept a gifted deposit in a mortgage application is a signed gifted deposit letter confirming the money is not a loan and the donor has no interest in the property.

For a fuller introduction to how equity release interacts with inheritance tax planning, our guide to equity release and inheritance tax covers the key considerations.

Where equity release fits in

For homeowners who want to help family now rather than waiting for an inheritance, releasing equity from the property is one way to turn illiquid property wealth into usable cash without selling the home. The released funds can then be gifted directly to a child or grandchild as a deposit contribution, following the same gifted deposit documentation requirements as any other cash gift.

A lifetime mortgage — the most common form of equity release in the UK — allows homeowners aged 55 and over to borrow against the value of their property, with the loan (and rolled-up interest) repaid when the property is eventually sold, typically when the homeowner moves into care or dies. The homeowner continues to live in the property. There is no monthly repayment required unless the product specifically includes that option.

The practical effect is that a homeowner with substantial equity can access a portion of it while they are alive and able to see the benefit their support provides — rather than leaving it to pass through their estate on death. For a clear introduction to how this works and who qualifies, see our guide to what is equity release.

What to be aware of

Equity release is not without cost. Interest accumulates on the outstanding loan over time, which reduces the equity remaining in the property when it is eventually sold. The amount that can be released depends on age, property value, and outstanding mortgage balance. The impact on the estate — and therefore on what ultimately passes to beneficiaries — should be considered alongside the benefit of making the gift earlier.

A straightforward cash gift from existing savings, if available, avoids those costs and achieves the same outcome for inheritance tax purposes. Equity release as a source of funds for gifting makes most sense where the homeowner has substantial property wealth but limited liquid savings — a position that describes many older homeowners in the UK.