A cash gift towards a child’s house deposit is a potentially exempt transfer: there is no tax when it is made, and it is outside the parent’s estate for Inheritance Tax once the parent survives seven years. A gifted deposit letter does not change the tax, but it fixes the money as a gift rather than a loan, and that choice decides what happens on the parent’s death and if the parent ever lives in the house.

Is there any tax when the deposit is handed over?

Usually not. For Inheritance Tax, a gift from one individual to another is a potentially exempt transfer, and GOV.UK explains that no tax is due on it if the giver lives for seven years afterwards. Nothing has to be reported to HMRC at the time.

There is no Capital Gains Tax on handing over sterling cash, because section 21(1)(b) of the Taxation of Chargeable Gains Act 1992 excludes sterling from the assets on which gains arise. If the deposit is raised by selling shares or a second property, that sale is a separate disposal with its own Capital Gains Tax position. The child pays no income tax on the money they receive; see tax on money you are gifted.

Which exemptions reduce the gift?

Several exemptions can take part of a deposit outside the seven year rule altogether:

  • The annual exemption of £3,000 per tax year, with any unused part carried forward for one tax year only. A parent who made no gifts last year can therefore cover £6,000, and two parents giving jointly can cover twice that.
  • The wedding or civil partnership exemption, up to £5,000 from a parent, where the gift is to a child who is getting married or forming a civil partnership. GOV.UK confirms it can be combined with the annual exemption for the same person in the same tax year.
  • The exemption for normal expenditure out of income. This rarely fits a single lump sum, but it can cover regular help afterwards. HMRC’s manual at IHTM14243 gives mortgage payments made on the recipient’s behalf as an example of a gift from income.

The rest of the deposit is the potentially exempt transfer. See the annual and small gifts exemptions for how they are ordered.

What happens if the parent dies within seven years?

The gift becomes chargeable. HMRC’s guidance on gifts says lifetime gifts are listed in date order and use the £325,000 threshold before the rest of the estate, valued at what they were worth when given. A deposit gift that is well within the threshold usually produces no tax on the gift itself, but it uses up threshold that would otherwise have sheltered the estate, so the estate pays more.

If the gifts in the seven years before death exceed the threshold, tax on the excess is reduced by taper relief where the gift was made between three and seven years before death. Once gifts exceed £325,000, GOV.UK explains that the person who received the gift may have to pay the tax on it. The child’s later increase in house value is irrelevant: the gift is fixed at the cash amount handed over.

What does a gifted deposit letter mean for tax?

A gifted deposit letter is a document mortgage lenders commonly ask the giver to sign, confirming that the money is a gift, that it does not have to be repaid and that the giver will have no interest in the property. It is a lending document, not a tax form, but it is strong evidence of what the family intended.

That cuts both ways. It supports treating the money as an outright gift from the day it is paid, which starts the seven year clock. It also makes it very hard for executors to argue later that the money was really a loan owed back to the estate. Families should not sign a gifted deposit letter while privately treating the money as a loan; the lender is relying on the statement, and the tax treatment will follow what was actually agreed.

What if the parent later lives in the house?

A parent who contributes cash towards a home and later moves in can meet the pre owned assets income tax charge in Schedule 15 to the Finance Act 2004. GOV.UK explains that the charge applies where someone gave money that another person used to buy property they later use. HMRC’s manual gives the example of a mother who gives her son £250,000 to buy a house and later moves in, and is charged from the date she moves in.

Two exclusions are relevant. A contribution that was an outright gift of money made at least seven years before the parent first occupies the property is excluded (IHTM44036), and so is one wholly covered by the annual or small gifts exemption (IHTM44038). The first exclusion does not apply to a loan that is later written off. See pre owned assets tax for how the charge is worked out.

When does a loan work better than a gift?

A loan suits parents who may need the money back or who want it repaid if the child’s relationship ends. HMRC’s manual at IHTM14317 says an interest free loan repayable on demand is not a transfer of value, because the right to repayment is worth the amount lent. Nothing starts a seven year clock.

The trade off is that the loan stays in the parent’s estate. Section 166 of the Inheritance Tax Act 1984 values a debt on the assumption that it will be repaid in full, so £50,000 lent is £50,000 in the estate on death unless recovery is genuinely impossible. What a loan does achieve is that any growth in the house belongs to the child, and the parent can release the debt later as a gift. The lender must be told the true position, because a loan from a parent is a debt the child owes. Our page on lending money to children covers the documents, the valuation on death and writing a loan off.

How might this work in practice?

Illustration only. In June, Sam and Alex give their daughter £60,000 for a deposit and sign the lender’s gifted deposit letter. Neither made any gifts in the previous tax year, so each has £6,000 of annual exemption available, covering £12,000. The remaining £48,000 is split between them as potentially exempt transfers of £24,000 each.

If both survive seven years, nothing is taxable. If Sam dies four years later, Sam’s £24,000 gift is added to his estate’s calculation and uses £24,000 of his £325,000 threshold. Taper relief does not reduce the estate’s tax, because it applies only where gifts on their own exceed the threshold. Had they lent the money instead, the full £30,000 owed to Sam would have been an asset of his estate, with no seven year clock running.

What mistakes come up most often?

  • Calling the money a gift for the lender and a loan for the family, leaving executors with contradictory evidence.
  • Not recording which exemptions were used, so executors cannot later work out what was covered.
  • One parent giving the whole deposit when both have annual exemptions available.
  • Assuming the gift is safe if the parent later moves into the house, without checking the pre owned assets charge.
  • Forgetting that a deposit gift uses up threshold that would otherwise protect the rest of the estate, even when no tax falls on the gift itself.

For a parent who wants to give the home itself rather than cash, see gifting a property to your children.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.