Personally I would let the client know I’m using a template IF I wasn’t going to change it so much. If I was just using it as a starting point however, and the template was reasonably generic, you could pass it off as your own (at your own risk!).
There is an element or morality in both cases to be honest, I guess it’s a judgement call on a job-by-job basis. A nice selling point could even be that you’re harnessing an exisiting design and modding it to their spec, AND lowering the cost in the process when compared to a ground-up custom build.