Richard, 79, from Cheshire, took early retirement at 58 on a generous final salary pension. He and his wife own their home outright and are financially comfortable. However, his 39-year-old son, who works in the arts and earns very little, rents a flat in Manchester and has been asking for help buying a property for years. Richard always refused, believing his son should work hard and save like he did.
Financial adviser suggests gifting to reduce IHT
Richard’s financial adviser recently warned that his estate faces a significant inheritance tax (IHT) bill upon his death. The adviser suggested that gifting money now could reduce that liability. Richard is now reconsidering his stance, asking whether this strategy is legitimate and whether it makes him a terrible parent to help only for tax reasons.
Sarah Davidson, Metro’s consumer champion, explains that from a purely financial perspective, the adviser is correct. Gifting during one’s lifetime is one of the most effective and legitimate ways to reduce an IHT bill. However, the rules are specific.
How the inheritance tax gifting rules work
Under HMRC rules, individuals can give away up to £3,000 each tax year without it being added to the value of their estate – this is the annual exemption. If the previous year’s allowance was unused, it can be carried forward, meaning Richard and his wife could potentially gift £12,000 entirely tax-free immediately.
For larger amounts, such as a house deposit, anything above the annual exemption becomes a “potentially exempt transfer” (PET). The key condition: the giver must survive for seven full years after the gift for it to be entirely free of IHT. If the donor dies within three years, the full amount is taxed at 40%. If death occurs between three and seven years, the tax rate tapers: 32% in year four, 8% in year six, and zero after seven years.
Practical steps for the gift
Davidson advises that if Richard proceeds, he must sign a “gift letter” for the son’s mortgage lender, confirming the money is a non-refundable gift and that he holds no legal interest in the property. The gift cannot have strings attached, nor can it be demanded back later.
Davidson also notes that the world Richard and his wife worked in is different from the one his son faces today, with stagnant wages and soaring house prices. The Bank of Mum and Dad now funds roughly half of all first-time buyer purchases in the UK, according to recent data.
Balancing morals and finances
Davidson concludes that while this approach may not be the warmest parenting moment, it is pragmatic. The son gains the security of his own home, and Richard protects a chunk of his wealth from the Treasury. Whether it makes them terrible parents is a question for a different kind of agony aunt.
