Britain’s housing market remains delicate, and much of its stability has been supported by the so-called Bank of Mum and Dad. However, this lifeline for many first-time buyers could soon come under pressure from possible tax changes.
Reports suggest that Labour is considering new inheritance tax rules which could significantly impact families who want to help their children onto the property ladder. According to The Telegraph, these plans could reshape how financial support between generations is treated.
Chancellor Rachel Reeves is said to be weighing up the idea of a lifetime cap on tax-free gifts. If introduced, this would mean that large sums of money given years before someone’s death – such as help with a deposit – would still be counted towards their estate for inheritance tax purposes.
The change would effectively make it less attractive for parents to provide financial help early, as these contributions would no longer be exempt. Experts believe this could slow the flow of parental support, reducing the number of buyers entering the market.
Nicholas Mendes, from mortgage broker John Charcol, warned that fewer tax-free gifts could place downward pressure on house prices. He explained that without parental support, transaction levels could fall, leading to weaker price growth, especially at the lower end of the market.
Data shows just how significant this support has been. Research from Savills found that more than half of first-time buyers – around 52 per cent – rely on financial help from their parents.
In 2023 alone, gifts and loans from parents amounted to £9.6bn. Nearly 173,500 first-time buyers received money from family members, with an average contribution of £55,572 each.
Any move to reduce this flow of funds would have wide-reaching consequences, not just for first-time buyers but for the entire housing chain.
Property experts have also warned that the knock-on effects could be severe. Roarie Scarisbrick, of buying agency Property Vision, said that changes to the way gifts are taxed would be damaging for an already slow market.
He explained that housing transactions are linked like a ladder, where each move depends on the success of others. When restrictions, such as stamp duty, are added, the system becomes clogged and less efficient.
Recent changes to stamp duty rules have already made things tougher for new buyers. First-time buyers previously paid no tax on homes worth up to £425,000, but since April, a property of that value now comes with a £6,250 bill.
Mr Scarisbrick stressed that any further disruption at the bottom of the ladder, such as reduced parental support, would ripple throughout the entire market. Families looking to move up would also find their options limited.
The combination of higher taxes and stricter rules could therefore risk slowing activity across the housing sector. Experts argue that while the intention may be to increase government revenue, the unintended consequence could be a further drag on an already fragile market.
Derailing plans
At present, parents can gift unlimited sums to their children without inheritance tax, provided the money is given at least seven years before death. Anything passed on within that period is taxed on a sliding scale, rising to 40pc if given in the final three years of life.
Experts warn that Labour’s reported plans to include lifetime gifts within inheritance tax would hit buyers the hardest, particularly in London and the South East where deposits are highest. Aneisha Beveridge of Hamptons noted that family support has become “a crucial stepping stone” in these regions, and capping tax-free transfers could disproportionately affect younger buyers.
According to Savills, the average deposit for a first-time buyer is £137,863 in London, £68,631 in the South East, and £26,858 in the North East. Despite higher incomes in the capital, Lucian Cook of Savills said deposits remain far out of reach, with the average London deposit equal to 138pc of annual income. Without family help, many would-be buyers cannot enter the market.
Richard Cook of Rathbones added that family contributions often “make the difference between dream and reality” for young buyers. He also warned that grandparents, who frequently step in with gifts, could be the most affected by any new rules, complicating estate planning.
The changes would not only impact first-time buyers but also those moving up the ladder. Adrian Anderson of mortgage broker Adrian Harris pointed out that parents often provide substantial sums to help with “forever homes”, citing a recent case where a client received £300,000 from their parents.
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