Parents hoping to help their children onto the property ladder are being urged to understand a little-known inheritance tax rule that could prevent thousands of pounds being added back into their estate.
Consumer group Which? is warning mums and dads to familiarise themselves with the £3,000 annual inheritance tax gifting allowance before handing over large sums towards a house deposit.
Money gifted to help children buy their first home could be included in an estate for inheritance tax purposes if the parent dies within seven years of making the gift.
Which? said parents transferring substantial sums without taking advantage of available exemptions could face a "hefty" inheritance tax bill.
Parents can reduce some of this risk by using the annual gifting allowance, which allows individuals to give away up to £3,000 each tax year without it counting towards inheritance tax.
Unused allowance from the previous tax year can also be carried forward for one year.
This means a couple who have not used their annual allowances in either year could potentially gift up to £12,000 between them without the money being subject to inheritance tax.
The rules also allow separate gifts of up to £250 per person.
Parents warned over inheritance tax rule that could affect house deposit gifts to children
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The warning comes as increasing numbers of first-time buyers struggle to save for deposits amid high house prices and stricter mortgage affordability requirements.
Mortgage lenders will typically ask borrowers to provide evidence showing where deposit funds originated.
Parents making an outright gift may also be required to sign a declaration confirming the money does not need to be repaid and that they will have no legal interest in the property.
Which? said gifting or lending money towards a deposit remains one of the most common ways parents support children purchasing a home.
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The consumer group recommends families decide from the outset whether financial support is intended as a gift, a loan or an investment
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It also advises documenting any arrangements properly to reduce the risk of disagreements in the future.
Parents are encouraged to seek professional advice before making significant financial commitments, particularly where retirement planning or inheritance tax liabilities may be affected.
Families unable to provide a cash deposit still have several options available to help children buy a property.
Guarantor mortgages, joint mortgages and joint borrower sole proprietor mortgages can all provide support.
Under a joint borrower sole proprietor mortgage, parents can help improve affordability calculations without being named on the title deeds.
Which? said: "If you're looking to help your child buy a property, the good news is that there are several routes available including gifting or loaning a deposit, acting as a guarantor for their mortgage or taking out a mortgage together."
The consumer group said understanding the tax implications of gifting money could help families avoid unexpected inheritance tax liabilities while supporting children with a property purchase.