Saving for a deposit on a house is one of the highest bars for first-time buyers to overcome. It is therefore unsurprising, then, that a common feature of buying a first home is gifted deposits.
Halifax recently found that the average deposit paid by first-time buyers was around £59,000. For many, saving this amount of money is just a fantasy, which is why help from family in the form of monetary gifts can help boost savings.
The minimum a mortgage provider will accept as a deposit is 5% of the property’s purchase price. But the larger the deposit, the better your position. This is because:
Even if you have saved your 5%, you can still benefit from a top-up. There is no limit to the size of the gifted deposit unless the lender has specific criteria in place. It should be borne in mind that the gift may be subject to inheritance or capital gains tax.
Homebuyers are finding it increasingly difficult to save up for a deposit. The costs of renting property, coupled with higher living costs, prevent many aspiring homeowners from saving much at all. So money given to a person or couple to help them buy a property in the form of a gifted deposit can contribute towards existing savings or form the entire deposit.
As with many things, it is not as straightforward as simply transferring money into your account and labelling it as a gift. There are several factors to consider, which we outline below.
Unlike a loan, gifted deposits are given on the strict understanding that the money will not have to be repaid. The person giving the gift must have no legal interest or rights in the property being purchased.
Mortgage providers tend to prefer the person gifting the money to be a close relative. This could be a grandparent, parent, or sibling. You can also receive gifted deposits from your partner. However, aunts, uncles, friends or those considered being traditionally more distant relatives may not be allowed. Many mortgage providers have strict lending criteria setting out who can gift money for a deposit, so if you are in this position, it is probably best to speak to your potential lender before committing to a particular product.
Most mortgage providers will not accept a gifted deposit if the individual giving the money is the person selling the property being purchased. Although this may seem an unlikely prospect, it could become a problem if you are buying from parents or another family member.
Different lenders have different lending criteria and rules surrounding gifted deposits. You must inform your mortgage provider and your conveyancer if your deposit has been gifted as part of anti-money laundering checks.
Your mortgage provider may require the person gifting the money to sign what is called a “Gifted Deposit Letter.” This must include:
Larger building societies and banks have gifted deposit declaration forms they will require you to complete. Smaller mortgage providers may simply ask for a signed and certified letter.
The person gifting the money will also need to provide evidence they have the funds. If the money is coming from the sale of a property, then this is simple to prove. However, if the money has been saved up over many years, your conveyancer may need to see multiple bank statements showing the accumulation of savings in order to satisfy the anti-laundering checks.
Proof of ID of the person gifting the money is also required. This can be done by showing photographic ID such as a driving licence or passport. Additionally, they will need to provide two different proofs of their address.
Mortgage providers regard gifted deposits completely separately from loaned deposits. A lender may accept a loaned deposit, so long as you can provide a signed declaration that it will only be repaid when the property is sold. Otherwise, they are likely to view the loan as a financial commitment, much like a credit card, for example. And any planned repayments will be considered when assessing mortgage affordability regarding the buyer’s outgoings.
Rules on gifted deposits and inheritance tax
Everyone is allowed to gift up to £3,000 per year tax free and carry any unused allowance into the next tax year (or use from the previous year). Therefore, parents could gift their child £12,000 without tax being an issue, providing they have gifted no money in the previous two years.
The gift could become liable to inheritance tax if the figure is larger than £12,000 or if the person gifting the money does not have the full annual inheritance tax allowance. If the person dies within 7 years of gifting the money, it is still classed as part of their estate and taxed accordingly. The amount of tax due on the gift decreases as the 7 years count down.
If a parent has gifted money to their child, and they are buying it with their partner, parents can protect the money being gifted in the event of separation with a declaration/deed of trust. This document states who the money was gifted to, which allows the parents to specify it was given to their child and not to the couple, ensuring the child retains ownership of the gifted money.
The deed or declaration of trust can also specify whether the money was a loan or gift, and when the loan should be repaid. However, if the child marries the other party, it could affect the deed/declaration of trust.
Many people choose to release equity in their home via an equity release scheme to unlock cash to use as a gift. This can work out to be an expensive commitment, so if this is a route you are considering, you should get specialist independent financial advice and talk through the implications.
If your parents cannot afford to give you a gifted deposit, there are other ways to help you buy a home, including:
A family member or friend puts down a deposit on your behalf (typically 10%) placing into a savings account. This is linked to the mortgage you take out on the property. The person providing the money agrees to leave it in the account for a set period, on which they earn interest. However, if any mortgage payments are missed, it may take longer for your loved one to get their money back.
Your family or friend agrees to guarantee they will make the mortgage repayments if you fail to make them or fall behind. This can be risky for the guarantor, particularly if they cannot afford to make the payments themselves.
A parent could take out a joint mortgage with their child, which would make them equally liable for repayment of the mortgage. However, if the parent already owns a home, the acquisition of the new property would count as a second home and mean payment of an additional 3% in stamp duty. Also, second homes, when sold, may incur capital gains tax. There are some mortgage providers that allow parents to take on a joint mortgage but won’t include their name in the title deeds. This enables them to get around any tax issues.
You should talk to your online conveyancing solicitor and mortgage broker about the options and process to get clarity before you commit to anything.
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