Gifted deposit vs savings as security: the inheritance tax fork
When a parent helps a first-time buyer over the deposit hurdle, there are two common routes — and they sit on opposite sides of an inheritance tax line that catches families out. Handing over cash for a deposit is a gift: it starts a seven-year inheritance tax clock and the money leaves your estate only if you live long enough. Locking savings with the lender as security is not a gift at all: the money never leaves your estate, and it comes back to you. The choice between them is rarely framed as a tax decision, but that is exactly what it is.
This guide explains how each route is treated under current HM Revenue & Customs (HMRC) rules. It is general information about how the system works, not advice on what any individual should do.
Why the deposit, not the payment, is the wall
For most first-time buyers the obstacle is the lump sum, not the monthly cost. Of the 879,402 residential sales recorded in England and Wales in 2025, 372,426 — 42.3% — completed at £250,000 or below (HM Land Registry Price Paid data, accessed 15 June 2026). A 10% deposit on a £250,000 home is £25,000 in cash that a buyer needs up front, on top of stamp duty and fees.
That £25,000 is the sum a helping parent typically wrestles with. Take WA9 3QG in St Helens, where 36 homes changed hands in 2025 at an average of £244,024 (range £189,995–£321,995). A buyer there needs roughly £24,000 to put 10% down. How a parent provides that £24,000–£25,000 — as a gift or as pledged security — determines whether the money ever counts in the parent's estate.
Route A — the gifted deposit (a potentially exempt transfer)
A cash gift from a parent to an adult child is, in inheritance tax terms, a potentially exempt transfer (PET). The "potentially" matters: the gift becomes fully exempt only if the giver survives seven years from the date of the gift. Survive seven years and the money is outside the estate entirely. Die within seven years and the gift is added back into the estate calculation (HMRC, Inheritance Tax Manual IHTM14000).
Several exemptions can reduce the gift before the seven-year clock even matters:
| Exemption | Amount | Note |
|---|---|---|
| Annual exemption | £3,000 per tax year | Unused allowance carries forward one year only (so up to £6,000) |
| Small gifts | £250 per recipient per year | Cannot be combined with the annual exemption to the same person |
| Gifts from surplus income | Unlimited | Must be regular, out of income, and not affect your standard of living |
| Wedding/civil partnership gift | £5,000 to a child | Lower limits for grandchildren and others |
So a single parent gifting £25,000 uses the £3,000 annual exemption (or £6,000 with last year's carried forward), leaving a PET of around £22,000. Two parents each have their own exemptions, which can shelter more of the sum immediately.
The seven-year taper — and the myth around it
Many buyers believe "taper relief" gradually shrinks the tax on any gift after three years. It does not work that way for a deposit-sized sum. Taper relief reduces the tax due on a gift, and crucially it only applies where the total of gifts in the seven years before death is over the £325,000 nil-rate band (HMRC). The headline taper table looks like this:
| Years between gift and death | Tax rate on the gift (above the nil-rate band) |
|---|---|
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% (exempt) |
A £22,000 PET sits comfortably inside the £325,000 nil-rate band, which is frozen at that level until April 2030 (HMRC). So if the parent dies within seven years, there is usually no taper-relievable tax on the gift itself — instead, the gift uses up £22,000 of the nil-rate band, which can increase the tax on the rest of the estate by up to 40% of £22,000, or about £8,800, but only if the estate is otherwise large enough to be taxable. Survive the full seven years and that exposure falls to zero.
The other feature of a gift is the one parents feel most: the money is gone. It is the child's deposit now. Lenders typically require a signed "gifted deposit letter" confirming the parent retains no stake in the property and expects no repayment — partly because a retained benefit could make it a "gift with reservation" that stays in the estate regardless of the seven years (HMRC).
Route B — savings as security (no transfer at all)
The second route is a security-backed or "springboard" family mortgage, where the parent pledges a sum — often the same £25,000 — into a savings account locked with the lender as collateral against the child's loan. Here the inheritance tax position is the mirror image of a gift:
- There is no transfer of value. The money stays in the parent's name. It is not a PET, so there is no seven-year clock to run.
- It never leaves the estate. Because the parent still owns the £25,000, it remains a chargeable asset — potentially exposed to the 40% rate on death, up to about £10,000, if the estate is taxable.
- It comes back. When the release conditions are met — typically a fixed term, or the loan falling to a set loan-to-value, or a clean payment record — the savings are returned to the parent, usually with interest.
The trade-off is liquidity and risk, not tax. The cash is locked and illiquid for the term, and it can be forfeited if the borrower defaults. But the parent keeps ownership throughout. There is no inheritance tax advantage — the money was never going anywhere — but there is no loss of the capital either.
The fork, side by side
| Gifted deposit (Route A) | Savings as security (Route B) | |
|---|---|---|
| What happens to the cash | Transferred to the child as their deposit | Stays in the parent's name, locked with the lender |
| Inheritance tax treatment | Potentially exempt transfer (PET) | No transfer of value — not a PET |
| Seven-year clock | Yes — outside the estate only after 7 years | None — never leaves the estate |
| Whose money is it | The child's (gone from the parent) | The parent's (returned on release) |
| If the giver dies within 7 years | Added back; uses nil-rate band | No effect — it was always in the estate |
| Returned to the parent? | No | Yes, on release |
| Indicative IHT exposure on ~£25k* | £0 after 7 years; up to ~£8,800 if death within 7 years | Up to ~£10,000 (stays a taxable asset) |
*Illustrative only, assuming the estate otherwise exceeds the nil-rate band. Actual figures depend on the full estate, available exemptions and the residence nil-rate band of up to £175,000 where a main home passes to direct descendants.
The genuine decision is not "which is cheaper" but what you want to happen to the money. A gift can move £25,000 permanently out of your estate — but only if you can afford to give it away outright and live seven years. Pledged security keeps the money yours and gives it back — but it stays a 40%-exposed asset and delivers no inheritance tax saving. They solve different problems.
Where the lines blur
A few situations complicate the simple picture, and an adviser should confirm them case by case:
- Joint accounts. Money gifted from a joint parental account may be treated as coming half from each parent, changing how exemptions apply.
- Strings attached. If a "gift" comes with an expectation of repayment or a share of the property, it can be a loan or a reserved benefit, not a clean PET — and lenders and HMRC treat the two very differently.
- Stamp duty. Helping with a deposit does not put the parent on the title, so it does not trigger the additional-property surcharge. Going on the mortgage or the deeds can — see how a joint borrower sole proprietor arrangement is treated for stamp duty and the wider JBSP versus guarantor comparison.
On the borrowing side, the monthly cost is the same whichever way the deposit is funded: at the Bank of England's latest quoted 75% loan-to-value five-year fixed rate of 4.32% (April 2026), a £225,000 repayment mortgage over 25 years works out around £1,228 a month — though a 100% loan-to-value springboard product will carry a higher rate than that benchmark.
You can browse the full set of first-time buyer and family-mortgage guides, or check the real sale prices and running costs on any street with the Homecost postcode tool.
This is general information about how inheritance tax and family-deposit arrangements work, based on HMRC guidance current at June 2026. It is not tax, mortgage or legal advice, and inheritance tax in particular depends on your whole estate. Speak to a qualified adviser before acting.