For many people, especially first-time buyers, saving for a deposit is one of the biggest challenges of buying a home. Gifted deposits have become an increasingly popular way of funding mortgage deposits and for parents to help their children climb onto the property ladder.
However, there's more to gifting money for house deposits than a parent simply placing a lump sum in your bank account. Read on to learn what gifted deposits are, how they work and the tax implications of using them for purchasing a property.
The Topics Covered in this Article Are Listed Below:
What Is a Gift Deposit?
A gifted deposit refers to funds given to you by a close relative to help you buy your first home. The money can either contribute towards the mortgage deposit or even be enough to cover the entire deposit. Money given to you for a deposit is only classed as a gift if the donor does not wish for the money to be paid back.
If you're expected to pay the money back, this constitutes a loan rather than a gift. As part of anti-money laundering regulations, you must have a clear paper trail for your deposit so that your lender and solicitor can trace the money back to a legitimate source. If the gifted deposit solicitor checks are unable to verify the source of the gift deposit, your mortgage application may be delayed or even rejected.
What Counts as a Gifted Deposit?
To be classed as a gifted deposit, the money must be given to you as a gift; the person giving it to you must have no intention of owning any part of the property or requiring that you pay them the money back. If the money is given to you as a loan, there’s an expectation of repayment.
Who Can Give a Gifted Deposit?
Mortgage lenders will usually accept gifted deposits if they've come from a close family member such as a parent, grandparent, sibling, uncle or aunt, etc. They may be less likely to accept it if it comes from someone who isn’t a family member, such as a friend.
What Are the Benefits of a Gifted Deposit Mortgage?
Receiving a gifted deposit allows you to get on the property ladder despite having difficulties saving up for a deposit. With a larger deposit, you won’t need to borrow as much and you'll have access to better mortgage rates, saving you money.
In addition, you don't need to pay a gifted deposit back and the person giving you the money has no legal rights over your property. As the gifted deposit won't prevent you from remortgaging the property in the future. You just need to have owned it for longer than 6 months and meet the lender's standard criteria for remortgaging.
Are There Any Risks of Using a Gifted Deposit?
You need to be aware of certain implications of parents giving you money for a gifted deposit. If the person gifting you the deposit dies within 7 years, you may be liable for Inheritance Tax depending on how large the person's estate is. If their estate is worth more than £325,000 - including the gifted deposit - you may pay some Inheritance Tax.
How to Get a Mortgage with a Gifted Deposit
You must provide your mortgage provider with a gifted deposit declaration as part of your mortgage application and the deposit must meet your lender's requirements.
Prove Your Deposit Is a Gift
You'll need to provide your lender with proof that your deposit has been given to you as a gift and not a loan. You can do this with a gifted deposit letter that outlines the details of the gift. A gifted deposit letter is a signed document that confirms the money has been given to you and you won’t need to repay it. The letter must be signed and dated by the person giving the gift and signed by a witness.
The letter must also include:
- The amount of money gifted
- The relationship between contributor and recipient
- The name of the person receiving the gift
- Confirmation that there’s no expectation of repayment
- Confirmation the gift doesn't give the contributor any share of the property and won't affect the security of the mortgage lender
- The address of the property you want to buy
- Confirmation the contributor is financially able to bestow this gift
Proof of Funds
The person gifting you the money may have to provide evidence of how they obtained the money - such as through the sale of assets, equity release, sale of shares, or by drawing down a pension. They'll need to provide copies of bank statements to meet anti-money laundering checks.
Proof of ID
The person who's gifting you the money for your mortgage deposit will be required to provide a photo ID, such as a driving licence or passport. They'll also need 2 forms of proof of address, such as utility bills or bank statements.
What Are the Gifted Deposit Tax Implications UK?
There are tax implications when using a gifted deposit. For example, a gift deposit from a parent is considered a "potentially exempt transfer". Everyone can gift up to £3,000 a year without being subject to Inheritance Tax. Any allowance that's not used is carried over from the previous year, allowing parents to potentially gift up to £12,000 without worrying about Inheritance Tax issues.
It's important to note that if the person giving you the money is still alive in 7 years, the money won’t be counted towards Inheritance tax. However, if they pass away within 7 years, the gifted money will count towards Inheritance Tax.
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Can I Add My Own Savings to a Gifted Deposit?
You are free to add your own money to the gifted deposit you've received – in fact lenders tend to prefer this. The bigger deposit you can put down on a property, the more competitive the mortgage deal you can get and the lower the repayments. However, you'll still be required to provide a gifted deposit letter for the money you've been gifted.
How Much of a Mortgage Can I Get with a £10,000 – £20,000 Deposit?
Some property developments offer a builder's gift deposit as an incentive. For example, they agree to contribute towards your Stamp Duty if you buy one of their properties. This could free up more of your money to put towards your deposit. Find out if a builder's gift deposit is a good idea?
What Are the Alternatives to Gifted Deposits?
There are alternatives to using a gifted deposit if your parents can't gift you money or you'd rather look into other options to fund your mortgage deposit.
Family Springboard Mortgage
With a Family Springboard Mortgage, a friend or relative can either:
- Have a charge put on their property for a fixed period of time, during which you must meet all your mortgage repayments and interest payments. They pay no money towards the charge, it simply acts as security for the lender. Once this period has passed, the charge will be removed from their property. If you miss any payments, you’ll put their home at risk of repossession by the lender.
- Put money - usually 10% - into an interest-earning savings account with the lender. This savings account is linked to your mortgage. The person providing the money can’t withdraw it for a fixed period of time during which you must meet all of your mortgage repayments and interest payments. If you miss payments, it may take longer for the person to get all their savings and any interest back.
Joint Borrower Sole Proprietor
If your income isn’t enough to achieve a 95% LTV mortgage for the deposit you have available, you could consider joint borrower sole proprietor to increase your maximum borrowing. Joint borrower sole proprietor arrangements have replaced guarantor mortgages. With joint borrower sole proprietor, you and your family member are both assessed as borrowers but only you go on the title deeds, meaning they have no ownership rights to the property. The benefit of doing this is that you will potentially be able to borrow more as the application will be based on both of your incomes. This won’t affect your deposit, but it may mean you can borrow at the maximum LTV for deposit you’re able to contribute.
If you’re a first-time buyer but your family member owns a property, you’ll still be eligible for the first-time buyer Stamp Duty exemption as only you’ll be going onto the title deeds.
Joint Mortgage
An alternative to a gifted deposit is to buy a property with your parent or relative and take out a joint mortgage. A joint mortgage will mean that you are both liable for repaying the mortgage and are both on the title deeds. With your combined incomes, you'll likely be able to take out a bigger loan. However, if one of the people on the joint mortgage already owns a property, the new home is considered a second home and will be liable for an additional 3% Stamp Duty Land Tax. This could make the property purchase more expensive. The property may also be subject to Capital Gains Tax. But if your lender allows you to take on a joint mortgage with just one person's name on the title deeds, you may be able to avoid these tax issues.
To find out more about gifted deposit mortgages or other options available to help first-time buyers, get in touch with us today on 0330 433 2927 or submit an online enquiry.
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