One of the most popular ways to help someone get onto the property ladder is a gifted deposit.
Getting your foot on that all-important first rung is hard, so many first-time buyers turn to the Bank of Mum and Dad for help. The thing is, gifting a deposit isn’t a straightforward process. One would think you simply need to transfer the money across to the giftee’s account, but that isn’t the case.
There’s a lot more to gifted deposits, and we’re going to explore all the frequently asked questions in today’s post.
What is a gifted deposit?
A gifted deposit is exactly as it sounds: A financial gift that’s used to form all or part of a mortgage deposit.
The gifter–be they parents, grandparents, friends, or other family members–must have no designs on owning any part of the property being purchased. A gifted deposit must truly be a gift. There must be zero expectation of receiving any return for it to qualify as such.
No stake will be held by the gifter, nor will they be mentioned on the mortgage application or deeds.
Who can gift a deposit for a mortgage?
Anyone can give a gifted deposit…in theory.
In reality, most gifted deposits are given by parents or grandparents to their children or grandchildren. While it is possible to get a deposit gift from a distant relation or friend, many lenders will insist on more checks being made and a greater burden of proof will fall on the gifter. This can significantly slow down the house-buying process.
So, while it’s possible to obtain a gifted deposit from anyone, gifts coming from anywhere other than parents and grandparents could prove problematic.
Is there a limit on how much deposit can be gifted?
Unless your lender has stipulated otherwise, there is no upper limit to how much a gifted deposit can be.
Gifted deposits and inheritance tax
While there isn’t an upper limit, larger gifted deposits may be subjected to inheritance tax.
Everyone can give up to £3,000 away each year, and this can be carried over from the previous 12 months. So, if both parents are alive, £12,000 can be gifted without any concerns over inheritance tax. Naturally, this is provided no other monies have been gifted elsewhere during that two-year timeframe.
Anything above that, or if money has been gifted elsewhere and the allowance was eaten into, inheritance tax could become due.
To read more about the tax implications of property gifts, check out this post on gifting property.
Do you have to declare gifted deposits?
Yes, both your solicitor and lender will need to know you intend to use a gift as your deposit in order for you to pass their money laundering checks.
How to draw up a gifted deposit letter or declaration
Most major high street mortgage providers will have a standardised form for gifted deposit declarations which you simply need to fill out and return.
If not, you’ll need to provide your lender with a gifted deposit letter as a declaration of the gift. These are relatively straightforward to compile, but it’s always a good idea to check with your mortgage broker before sending, as some lenders will have different criteria that need to be met.
A basic outline would look something like this:
- Who is receiving the gift?
- Where is the money coming from?
- What is the relationship between the two parties (gifter and giftee)?
- How much is being gifted?
- Confirmation no stake in the property will be held by the gifter
- Confirmation of no expectation of repayment
- Evidence of the gifter’s solvency
Is there any additional proof required when gifting a deposit?
In addition to the gifted deposit letter, the person offering the gift will need to provide the following:
- Proof of ID: Identification inspections are made to meet AML (Anti-Money Laundering) checks and can vary from solicitor to solicitor. Generally, this will be a simple check of the gifter’s photo ID, so either a passport or driver’s licence will suffice. In addition, two separate forms of address identification will also be required (bank statements and utility bills are the most common).
- Proof of funds: This can be a little trickier, especially if the gift has been saved over a long period of time. If this is the case, you may need to provide multiple forms of proof, such as bank statements going back over a given period. Your solicitor will be able to advise you on exactly what you need to provide in order to pass the anti-money laundering checks.
Can you add your own savings to a gifted deposit?
Yes, you can indeed add your own funds to the gift in order to up your overall deposit amount.
If you are in a position to add some savings of your own to the gifted deposit, you should definitely do so. Having a bigger deposit means greater choice in the mortgage product market. Better rates become available to you when your deposit amount rises.
Check out How Much Deposit Do I Need For A Mortgage? for more information on how lenders price their products and what you need to do to get the best deal possible.
How to protect a gifted deposit
As we’re talking about decent sums of money here, the question of how to protect a gifted deposit naturally arises.
This is particularly pertinent for those who are gifting money to someone who intends to buy property with someone else. What happens if they end up going their own separate ways in two, five, or ten years' time? Is there any way to determine what would transpire should that scenario occur?
It’s called a declaration of trust.
A declaration of trust clarifies such details. Typically drawn up at the time of purchase, this legally binding document states exactly what will happen should the parties involved choose to sell by mutual agreement or if one wants to buy the other out. It’s a solid way to protect the interests of all parties fairly.
Without one, repayment amounts and who is owed what can be problematic to resolve.
Remember, a loan is not a gift
Finally, it’s important to reiterate the point that a gifted deposit cannot be a loan.
That isn’t to say loans cannot be obtained from family members. They can, but you must declare them as such. Failure to do so could compromise your mortgage application.
If you are in any doubt whatsoever, speak to your conveyancing solicitor before submitting anything to your lender.
That’s it for this week, we sincerely hope you found this guide to gifted deposits both useful and informative.
Remember, too, that if you are looking to buy a home in or around London, we can help. Petty Son and Prestwich have been making property dreams come true since 1908, and we’d love to add you to our ever-increasing list of happy, satisfied customers. If you have any questions you’d like answers to, or would like to register your interest as a buyer, please do not hesitate to reach out to our friendly sales staff.
Our team of friendly experts can help you find and secure your ideal home, and they’ll ensure the entire process is as stress-free as it possibly can be too.