Gifted Deposits. How Do They Work?

House prices are at an all-time highs and saving for a deposit is the largest obstacle first time buyers are faced with. Which is why it is common for deposits to comprise of money which has been gifted by family. The gifted deposit can be any amount up to the entire deposit. Unlike a loan, they are given with the intention of a gift with no interest in repayment or the property. However, there are certain precautions which need to be adhered to to identify the source of funds.

A 5% deposit is the minimum your lender will require, however, a larger deposit comes with the advantage of a smaller monthly repayments and access to a larger range of mortgage options. This can be particularly helpful in managing monthly expenses in the long term.

Who can gift a deposit for a mortgage?

Most mortgage lenders prefer it if the person gifting you the money is an immediate relative, such as a parent, grandparent or sibling. You can also receive a gifted deposit from a partner. But more distant relatives such as aunts and uncles, or friends, may not be allowed. Other lenders’ lending criteria may state it must be a parent who gifts the money.

Most lenders won’t accept a gifted deposit if the person giving the money is the vendor – the person selling the house. It may seem like an unlikely prospect but it could be a problem if you’re buying a house from your parents or another family member.

Do you have to declare gifted deposits?

You will need to ensure your solicitor and lender are aware that your deposit is to comprise of a gift so they may conduct anti-money laundering verification. If you receive a gifted deposit, the lender will insist upon a declaration letter. This will have to include the following:

• The names of the giftor and giftee and their relationship.

• How the funds were accrued.

• The sum of money gifted.

• Confirmation that the money is a gift and not a loan.

• The giftor does not have any legal interest in the property.

• Confirmation the giftor is not bankrupt.

Although bigger lenders may provide a form that can be completed, smaller lenders may request a letter. Please contact us to discuss more options.

The solicitors will have to be provided with the source of the gifted money for example inheritance, sale of a property or general savings. Usually bank statements will suffice. The solicitors will also need to conduct identity verification and therefore valid identification will be requested.

Can the deposit be loaned instead of gifted?

Most lenders will take the view that a loan is an additional financial commitment and therefore will affect how comfortable you would be with your monthly repayments. Some mortgage lenders may accept a loan on the basis that the borrower will provide a declaration to confirm that the loan will only be repaid upon sale of the property.

What are the rules on gifted deposits and inheritance tax?

The yearly exemption for inheritance tax is £3000 and any unused allowance can be carried on. However, if this exceeds £12,000, it may become liable for inheritance tax. This is because if the person gifting the money dies within seven years, the money will form part of their estate and therefore be liable to inheritance tax should their estate exceed the threshold. If the sum of the total estate exceeds £325,000, there will be a 40% tax on anything which exceeds.

This is because if the person gifting the money dies within seven years of handing it over it would still be classed as part of their estate for inheritance tax purposes. So if their total estate, including the gift, is worth more than £325,000 then up to 40% tax would be due on the excess. And the amount of tax due on the gift decreases as the seven years elapse.

How can I protect a house deposit gift?

If you’re gifting your child a deposit for a property they are buying with additional parties such as friends or partners, a deed of trust can be drawn up to ensure your family member retains ownership of the money they have been gifted and it will not pass to the other owners.

A deed of trust can also be used to clarify any other aspects as detailed below:

• Responsibilities for outgoings.

• What will happen to the property should parties decide to separate.

• Confirmation whether the money is a gift or a loan any terms of repayment.

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How can I fund a gifted deposit?

Homeowners can use equity release to free cash from their property to be used as a gift. This is an expensive commitment and we recommend you carefully consider whether is a financially viable option. The same applies for gifted money which derives from pensions and savings.

Find out more about alternatives to gifted deposits.

Are gifted deposits that common?

According to the English Property Survey 2020-2021, 85% of first time buyers purchased their property using savings. 6% used money from an inheritance and 28% of individuals received help from family and friends. Which brings us to gifted deposits. The number of people using gifted deposits has dropped drastically from a once 39% whilst people purchasing from savings is on the rise.