Gifting a House Deposit: The Mortgage Paperwork and Inheritance Tax Rules

Why lenders demand a specific letter

When part or all of a mortgage deposit comes from someone other than the buyer — most commonly a parent or grandparent — the lender needs certainty that the money is genuinely a gift, not a disguised loan or an arrangement that gives the donor an undisclosed stake in the property. This matters because:

• A loan changes the buyer's real financial position and affordability, since it may need repaying alongside the mortgage
• An undisclosed interest in the property could complicate the lender's security if the donor later claimed a beneficial interest
• Anti-money-laundering rules require the source of significant funds moving into a property transaction to be verified

The gifted deposit letter, provided to the lender and the buyer's conveyancing solicitor, formally confirms:

1. The money is an outright, unconditional gift
2. The donor has no right, interest or expectation of repayment in relation to the property
3. The donor won't reside in the property (or, if they will, this is disclosed and considered separately)
4. Details of the source of the gifted funds

The Inheritance Tax angle

Gifting a deposit is also, unavoidably, a gift for Inheritance Tax purposes — and this has consequences the donor should plan for, separate from the mortgage paperwork itself.

The £3,000 annual exemption

Every tax year, an individual can gift up to £3,000 completely free of any IHT consideration — this amount falls outside the estate immediately, with no 7-year survival requirement. If the previous year's £3,000 exemption wasn't used, it can be carried forward one year only, potentially allowing a gift of up to £6,000 to fall immediately outside the estate.

Potentially Exempt Transfers (PETs)

Any gift above the annual exemption is a Potentially Exempt Transfer. It is not taxed at the time of the gift, but if the donor dies within 7 years, the gift is brought back into their estate for IHT calculation purposes, potentially using up some or all of their nil-rate band and, in larger estates, generating an IHT liability.

Practical planning points for donors

1. Gift earlier rather than later if IHT exposure is a genuine concern for your estate — starting the 7-year clock as soon as possible reduces risk.
2. Keep records of the gift, including the date and amount, since executors will need this information when calculating IHT on your eventual estate.
3. Consider whether life insurance (a term policy covering the 7-year PET period, sometimes called "gift inter vivos" cover) is appropriate if the gift is large relative to your estate and IHT exposure is a real concern.
4. Understand that gifting doesn't reduce your estate's value assessment immediately if you don't survive 7 years — it's a bet on longevity, not an instant tax reduction.

Practical points for the buyer

• Provide the gifted deposit letter to your solicitor and lender as early as possible — delays here are a common cause of last-minute mortgage delays
• Be prepared for the donor to provide evidence of the source of funds (bank statements showing the money's origin) as part of anti-money-laundering checks
• If more than one person is gifting funds (e.g. both parents, or parents and grandparents), each may need to provide their own separate letter and evidence

Bottom line

Gifting a deposit is one of the most common ways UK buyers get onto the property ladder, but it comes with two separate sets of rules to satisfy: the lender's requirement for a clear, unconditional gifted deposit letter, and the donor's ongoing Inheritance Tax exposure under the 7-year Potentially Exempt Transfer rules. Treat the gift as genuinely irrevocable when signing the letter, and factor the IHT timeline into the donor's own estate planning rather than assuming the gift is immediately tax-neutral.