Gifting a deposit for a first home? 4 important considerations to make

For many first-time buyers, the dream of homeownership may now feel out of reach, because saving for a deposit can be challenging in today’s economic climate.

You may be surprised to learn that, according to the Home Builders Federation (HBF), even if the average first-time buyer saved 100% of their monthly earnings, it would take about four years to build up a large enough pot to buy their first home.

Indeed, according to the Office for National Statistics, the average UK house price in June 2025 was £269,000. With a standard 10% deposit, the average first-time buyer would need at least £26,900 to buy their first home – plus additional funds for fees and moving-in essentials.

In some cases, lenders may allow a 5% deposit, but certain eligibility criteria may apply, and the buyer’s mortgage repayments may be less affordable month-to-month.

This is where the Bank of Mum and Dad, or the Bank of Family, can support their loved ones, offering a much-needed financial boost in the form of a gifted deposit.

While helpful, there are crucial considerations to make before gifting money for a deposit, as there are legal requirements and potential Inheritance Tax (IHT) implications to keep in mind.

Here’s what you need to know to make informed decisions and ensure a smooth process for all involved.

1. A gifted deposit must come with no strings attached

First, it’s important to understand what a gifted deposit is. In the UK, it’s a sum of money provided to a homebuyer as a genuine gift, with no expectation of repayment and no claim to ownership or legal interest in the property.

This distinction is crucial.

If you expect any form of repayment, lenders will treat the money as a loan. If this is the case, then it may affect the homebuyer’s mortgage affordability calculations, leading to potential delays or even rejections.

So, you may need to write a letter stating that you have given the money as a gift, as the buyer’s mortgage lender needs to verify that the funds are legitimate and that they can genuinely afford the mortgage.

Typically, you will need to include the following details in your gifted deposit letter:

• The homebuyer’s full name and address
• Your full name and address
• The exact amount of the gift
• Your relationship to the homebuyer
• A clear statement that the money is a gift and you do not expect to receive any repayments
• Confirmation that you will have no legal interest or stake in the property being purchased
• Evidence that you are financially secure and able to make the gift.

Lenders may have their own forms for this, or the homebuyer’s solicitor can help you draft one. You may also need to provide proof of your identity to satisfy anti-money laundering checks.

2. Gifted deposits usually come from close family members

Lenders often have preferences when it comes to gifted deposits, and they prefer the gifts to come from close family members, such as:

• Parents, step-parents, or parents-in-law
• Partners living with the applicant
• Aunts, uncles, nieces, and nephews related by blood
• Grandparents or step-grandparents
• Siblings, half-siblings, step-siblings, or siblings-in-law
• Children, including direct descendants, stepchildren, children-in-law, or adopted children.

Gifts coming from more distant relatives or friends could face additional scrutiny and may not be accepted by all lenders.

If, for instance, you wanted to help a friend onto the property ladder, it could help to check with their mortgage adviser early in the process to ensure you avoid any potential obstacles or delays when gifting a deposit.

3. Providing a gifted deposit could affect the amount of Inheritance Tax levied on your estate

Some financial gifts, including a gifted deposit, could incur Inheritance Tax (IHT) if you die within seven years of making the gift.

This is known as the “seven-year rule”.

It’s important to note that this rule only applies if the total value of the gifts made in the seven years before your death exceeds your nil-rate band. If you’re leaving a home to a direct descendant, your residence nil-rate band could increase the tax-free portion of your estate to £500,000.

Keep in mind IHT on gifts given while you’re still alive work on a sliding scale, also known as “taper relief”. This simply means that the longer you live after giving the gift, the less IHT could apply.

Here’s a simple breakdown of how taper relief works:

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

There are several gifting allowances that can help mitigate IHT, which don’t fall into the seven-year rule:

• Your annual exemption. Everyone has an annual exemption of £3,000, as of the 2025/26 tax year. This means you can gift this amount each tax year without it being subject to IHT, regardless of the seven-year rule. You can also carry this allowance forward by one year, meaning you could potentially gift £6,000 in a single tax year.
• The small gift allowance. You can give as many gifts of up to £250 per person each tax year, as long as you haven’t used another allowance on the same person.
• Gifts for weddings or civil partnerships. You can give up to £5,000 to a child getting married or starting a civil partnership. You can also gift up to £2,500 for a grandchild or great-grandchild, and £1,000 to any other person.
• Gifts from regular income. Regular payments made from your surplus income can be exempt from IHT, provided they don’t affect your usual standard of living. Here, it’s important to document everything to ensure your beneficiaries don’t meet any obstacles with your estate.

Given the complexities of IHT planning, it can be helpful to seek the advice of a financial planner for both you and the recipient. This could make it easier to understand the specific implications for each person’s circumstances.

4. Seeking professional advice could be crucial

Gifting a deposit can be a great way of helping someone you love to take their first step onto the property ladder. And, by understanding the rules and regulations involved, both parties can make informed decisions.

This is where our preferred mortgage partners can help.

Advantage FS prides itself on helping its clients navigate the dynamic world of mortgages. So, whether you’re looking to help someone buy their first home or are exploring your own mortgage options, get in touch.

Email info@advantagefs.co.uk or call 0117 442 0604 to find out more about how Advantage FS can help you.

If you would like to explore how gifting a deposit could affect your financial plan and estate, then speak to us here at J Edward Sellars for tailored advice.

Simply email enquiries@jesellars.co.uk or call 01934 875 919 to book a consultation.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

The Financial Conduct Authority does not regulate tax planning or estate planning.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.