How Helping Family Members Buy Their First Home Can Also Help Offset Inheritance Tax

Buying a first home is a major milestone — but in today’s market, it’s increasingly difficult for first-time buyers to take that step. The supply of new homes continues to lag behind demand, and house prices have steadily risen[1]. Combined with the ongoing cost-of-living pressures, it’s no surprise that younger generations are finding it harder to get on the property ladder than their parents or grandparents did —at least not without some assistance.

Support getting onto the property ladder can come in many forms, but one of the most significant in recent years has been direct financial assistance from parents or grandparents. A recent study found that more than half of first-time buyers received assistance from their family, with the average contribution reaching £52,572[2]. The last four years saw parents or grandparents providing £38.5bn of assistance to first-time buyers, a 71% increase compared to the previous four years.

Helping your children of grandchildren buy their first house can be an incredibly rewarding. There’s nothing quite like visiting them in their new home and knowing that you helped make that dream a reality! However, with such a monumental gift it is important to think about the implications on your own financial situation. One thing you may want to consider is how gifting can interact with your inheritance tax (IHT) planning. Helping the next generation may not only help improve their financial security, but also prove tax efficient for you.

Millennials

Often dubbed the “Peter Pan” generation, millennials are reaching life milestones — such as marriage, children, and homeownership — later than previous generations. But this isn’t due to a lack of ambition. Rather, many are waiting until they feel more financially secure. Homeownership remains an important aspiration for millennials: 45% of those without a mortgage state they expect to have one within the next five years[3]. And in recent years, home ownership amongst 25-34 years olds has seen an uptick, rising from 26% in 2015-16 to 31% in 2023-24[4]. However, this is still well below the 55% peak seen in 1990[5]. But the affordability gap is stark and house prices have risen significantly. Against this backdrop, it’s no surprise that family assistance has also increased. Whether motivated by a desire to see their children settled or to pass on wealth during their lifetime, family support has become a critical part of more first-time buyers’ journey.

Helping the Next Generation: Gifting and Inheritance Tax Considerations

UK families continue to pay more IHT than ever before. In the last 20 years, IHT receipts have increased by 148%, to £8.2 billion for the financial year ending March 2025[6].

IHT is charged at a rate of 40% on estates worth more than the nil rate band, which is £325,000. This increases by £175,000 to a total of £500,000 if you are leaving a family home to your children or grandchildren. Because transfers between spouses are tax-free, a married couple with a house could leave their children or grandchildren £1 million before they have to worry about IHT.

IHT rules mean you can’t simply gift as much as you would like without some careful considerations. However, to start, there are a number of allowances you can take advantage of.

Annual exemption: Each individual can gift up to £3,000 per tax year without it being added to the value of their estate for Inheritance Tax (IHT) purposes. If this goes unused, it can be carried forward one year meaning you could gift £6000 in one year. The annual exemption can also be combined with a gift from surplus income and paid to the same person.
Gifts from surplus income: You can give away as much of your income as you would like, provided that it comes from income not capital, it follows a regular pattern and doesn’t affect your standard of living. These gifts are exempt from IHT, however it is important you keep a clear record of what income you are gifting.

However, even if these allowances aren’t enough to cover the scope of the support you would like to provide, there may still be no IHT to pay. That’s because any gifts you make in excess of the permitted allowances are could be considered to be ‘Potentially Exempt Transfers’. These gifts would be subject to the seven-year rule.

The Seven Year Rule: If you live for at least seven years after making the gift, it may be considered as wholly out of your estate and no longer subject to any IHT. If you pass away before, taper relief may apply to any gifts that exceed the £325,000 nil-band rate:

Years between gift and death	Rate of tax on the gift
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 or more	0%

If you are thinking about utilising any of these strategies to make a gift, speak to your financial planner who will be able to provide further clarity on the rules and how this may impact your financial plan.