The UK’s already fragile property market could be dealt a heavy blow if Labour pushes ahead with rumoured inheritance tax reforms. Reports suggest Chancellor Rachel Reeves is considering a lifetime cap on tax-free gifts, which would mean contributions parents or grandparents make towards deposits would eventually count towards inheritance tax (IHT) liability.
Experts warn this could dismantle the so-called “Bank of Mum and Dad”, which last year alone contributed nearly £9.6bn to first-time buyer purchases. More than half of new homeowners (52pc) rely on parental or family support to get on the ladder, according to Savills. Removing this option, or making it less attractive, could shrink demand, slow transactions, and dampen house prices, especially in high-cost areas such as London and the South East.
The Bank of Mum and Dad under threat
The property market has long been propped up by family generosity. In 2023, 173,500 first-time buyers received an average of £55,572 each from parents or grandparents. Without this boost, experts fear many young buyers would be priced out completely.
Mortgage broker Nicholas Mendes of John Charcol said:
“Restrictions on tax-free gifts would hit house prices and cause fewer people to buy. It would mean fewer buyers entering the market, slowing transaction volumes and dampening price growth.”
Knock-on effects for the property chain
It’s not just first-time buyers who would suffer. Experts note that if fewer new buyers enter the market, the whole housing chain becomes clogged.
Buying agent Roarie Scarisbrick explained:
“You’ve got people moving up and down the ladder all the time, and each rung depends on the others. Taxes like stamp duty already clog up the chain – changes to gifts would be disastrous.”
Regional disparities: London and the South East most exposed
High-cost regions could feel the impact most sharply. In London, the average deposit for a first-time buyer is £137,863, compared with £68,631 in the South East and £26,858 in the North East.
Aneisha Beveridge of Hamptons noted:
“Financial support from family has become a crucial stepping stone in expensive regions. Any move to cap lifetime tax-free transfers would disproportionately affect buyers here.”
Beyond first-time buyers: “next-time” homeowners at risk
It’s not only younger buyers who would be affected. Mortgage broker Adrian Anderson warned that “next-time buyers” also rely on family wealth to move into larger “forever homes.” He shared one recent case where parents gifted around £300,000 to help their child purchase a property.
Wealth manager Richard Cook of Rathbones added:
“Support from the Bank of Mum and Dad often makes the difference between dream and reality for young buyers. If capped, it risks derailing the plans of both first-time and next-time buyers.”
A potential blow to intergenerational wealth planning
Inheritance tax has long been viewed as one of the most complex and contentious areas of UK taxation. Current rules allow unlimited gifts if they are made at least seven years before death, creating a vital route for parents and grandparents to transfer wealth while helping younger family members. A lifetime cap would mark a significant departure from this principle, limiting not just tax planning options but also the ability of families to pass on financial security in real time.
Financial planners warn this could also create new layers of complexity in estate planning. Families who might otherwise have given gifts early could be forced to seek out alternative strategies, from trusts to more intricate financial products, which often come with higher costs and barriers to entry.
A political and social balancing act
While Labour may argue that the proposed cap ensures fairness in wealth distribution, critics say it risks punishing aspirational families who have saved specifically to help the next generation onto the property ladder. In a climate where wage growth continues to lag behind house price inflation, the ability to give tax-free assistance has become less of a luxury and more of a necessity.
This sets up a wider political challenge: how to balance fiscal responsibility with social mobility. Limiting family transfers might raise revenues for the Treasury, but the knock-on effects for housing affordability and intergenerational opportunity could prove politically costly.
Market uncertainty and unintended consequences
Ironically, talk of reforms could initially fuel activity, as families rush to complete transfers before changes are introduced. Mendes suggested:
“Speculation around tax grabs typically spurs a flurry in activity. It could create a temporary surge in demand, briefly pushing up prices.”
But Savills’ finance chief Simon Shaw warned that the current vacuum of information is already chilling the market:
“In the interim period, it creates a level of uncertainty. People fill the vacuum with their own fears about what might happen.”
Government’s position
The Treasury has stressed that it is focused on economic growth rather than tax hikes. A spokesman said:
“We are committed to keeping taxes for working people as low as possible… changes to tax and spend policy are not the only ways of strengthening public finances.”
Final Summary
If Labour introduces a lifetime cap on tax-free gifts, the effects on the property market could be severe. With more than half of first-time buyers dependent on parental support, any restriction on the flow of family wealth risks reducing demand at the entry level of the ladder – with knock-on effects all the way up the chain. London and the South East, where deposits already far outpace earnings, would be hardest hit.
Beyond the numbers, the move would represent a fundamental shift in how families are allowed to plan and share wealth across generations. What has long been a practical way to ease the tax burden and give younger people a foothold in the housing market could suddenly become a liability.
While speculation may create a short-lived buying rush, the long-term risk is reduced affordability, stalled transactions, and weaker price growth. Until the Government provides clarity, uncertainty itself may further cool an already sluggish market.
