The so-called “Bank of Mum and Dad” helped half of all first-time buyers onto the property ladder last year, with parents gifting or loaning an average of £58,000. 

Family members handed out a record £9.8 billion to their children in 2021, according to estimates by estate agency Savills. The Bank of Mum and Dad, and its counterpart the “Bank of Grandma and Granddad”, has been heavily relied upon thanks to extortionate house prices, but generous benefactors should be aware of tax traps along the way. 

For generations the notion of trusts have been associated with the super-rich and their popularity has waned in recent years. However, they can be a handy means of managing inheritance tax for parents or grandparents hoping to ring fence wealth for a loved one’s future. 

Putting money into a trust, as opposed to straight-forward gifting, also protects against the risk of funds being squandered by young beneficiaries or lost to failed relationships. 

How can I gift my children a deposit?

When money is transferred into a trust, if certain conditions are met it is not no longer included in the benefactor’s estate for inheritance tax purposes.

But this does not mean parents or grandparents lose control of the funds altogether.

Clare Jeffries, of law firm Russell-Cooke, said: “You can put money into a trust for children and grandchildren to purchase a first home, but remain as the trustee so you decide how and when that money is distributed to the beneficiaries.

“In terms of the donor’s IHT planning, placing assets into a trust can remove them from the donor’s taxable estate, avoiding the 40pc IHT charge, provided it is done at least seven years prior to the donor’s death.”

The seven-year clock begins counting down as soon as the assets are placed in a trust, although funds can also be added in stages rather than as one lump sum. 

“It can similarly be distributed to the beneficiaries all at once or at intervals – for example, to give to each of several beneficiaries a deposit to assist in buying a property as and when they need it, or to meet other costs of purchase such as mortgage repayments,” said Ms Jeffries. 

When a parent or grandparent sets up a trust they decide the rules of its management, such as if the beneficiary receives the funds at a certain age. The trust can also pass through generations, because they can last up to 125 years, and therefore both parents and grandparents can use it to pass on wealth to unborn children or grandchildren.