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Saving to buy a home is not easy nor is it cheap. Deposits can be anything from 5% to 25% with 10% – 15% being very typical and then there are legal fees, moving fees and potentially stamp duty on top. All in all, this can make owning a home seem like a massive uphill struggle, especially for first time buyers who have no equity in an existing property. This is where gifted deposits come in to save the day, but what are they, how do they work, how do you get one and what are the implications of them? In this article we cover some important considerations for gifted deposits, so if you are looking at this as an option to help get on the property ladder, read on…
What is a gifted deposit?
It is exactly what it says on the tin. It is a sum of money gifted to a home buyer to help pay towards or pay all of the required deposit. It isn’t quite as simple as a parent or friend giving the money to the home buyer and saying “here is my gift to you” there are some legally required pieces of administration that will have to be completed. Also remember that a lender does not have to accept gifted deposits so, whilst most will, it isn’t guaranteed.
Who can gift a deposit?
Legally it can be anyone, but lenders tend to require that the person gifting the deposit is an immediate family member such as a parent, brother, sister or spouse. Quite a few insist that it is parents only that can gift deposits, so if you are looking at taking this option, check with your lender about their criteria.
What are the gifting rules?
It is important to note the key word in this: Gifted! A gift, as we all know, is when someone gives something to someone else with a view that this person keeps the gift and need never return it. This is the same for the gifted deposit and the person gifting the deposit will need to sign a declaration stating:
- Who they are gifting the deposit to and how much is being gifted.
- Where the funds came from (part of the money laundering regulations).
- The relationship between the person gifting and the person receiving the gift.
- Confirmation that the money is a gift and that it never needs to be repaid.
- Confirmation that the person making the gift has no stake in the property being purchased.
The person making the gift will also, most likely need to prove their identity. Again, this is part of the anti-money laundering process.
Why can’t I be loaned a deposit?
It depends on the lender, but for the most part, a loan is seen as a financial commitment and will then count against the home buyer in terms of the affordability calculations, which might then make the mortgage unaffordable. Some lenders might allow this with the caveat that the loan is not repaid until the property is sold but they are often reticent to allow this in case the property ends up in negative equity with multiple creditors with a stake in the property.
Gifted deposits and Inheritance tax
Assuming no previous financial gifts have been made by the person gifting the deposit, they can gift up to £6,000 without it attracting inheritance tax. If both parents, for example, are making the gift, then up to £12,000 can be gifted with no inheritance tax implications at all. If the gift is greater than that, though and the person making the gift dies within 7 years of making the gift, the person who received the gift could be liable to pay inheritance tax on the gifted deposit.
Gifted deposits and Joint Ownership
As is often the case, a couple choose to buy a property together. If the parents of one of the partners are gifting the deposit, they might want to consider what would happen in the unfortunate event that the couple split and need to sell the property. It is likely, that they wouldn’t want the deposit to be split between the two ex-partners. To mitigate this a deed or declaration of trust would be needed which would legally declare that the amount of money that was gifted should be returned to a specific person. The deed will specify who the money was given to and who it needs to be returned to should the property be sold after a split.
Can a Gifted Deposit be topped up?
If you have any savings then, yes, the gifted deposit can be topped up to provide a larger deposit. You would need to prove the source of the funds, which is normal for any deposit, but the savings could be added to the gift to top up the deposit amount.
Gifted deposits can be a great way of gathering a deposit together for a mortgage and most lenders will accept gifted deposits as long as the person gifting the deposit declares that they will not want re-paying and that they have no stake in the property.
