The generous generation: gifting money to children for home deposits
Rising property prices can be seen as either a blessing or a curse. For people who already own their homes, rising values are seen as a good thing. This is doubly so if they also have investment properties whose rising values may allow them to retire early and enjoy a generous pension.
However, for those looking to get their foot on the property ladder, first-time buyers, rising prices are daunting. The higher the price of the property, the greater the deposit they need to buy it. According to Halifax, in 2022, the average deposit paid on a property in England was £62,500. For many people, saving up that kind of sum can be, to say the least, challenging. For others, it is impossible. Hence the emergence of the “gifted deposit”.
What is a ‘gifted deposit’?
The term ‘gifted deposit’ refers to a lump sum of money given to a property buyer to help them buy the property. The gift will usually be made by a close family member such as a parent, partner, grandparent or sibling. The sum can represent the whole of the deposit required or a contribution to it. While the process sounds simple, there is, in fact, quite a lot more to it than that.
First, the money must be an outright gift and not a loan. The person giving the gift, the donor, must not demand repayment, interest or any rights in the property to the purchased. If the buyer has to repay the money or any part of it, then it is considered to be a liability, which may impact the buyer’s ability to meet the mortgage repayments.
First of all, the gift will have to be approved by the prospective mortgage lender. Most mortgage lenders are used to gifted deposits but there is a wide variation in policies relating to them. While some mortgage lenders will accept a gifted deposit from a close family member, other lenders will only accept them from parents.
Mortgage lender’s approval
All gifted deposits must be notified to the prospective mortgage lender and approved by them in accordance with their specific requirements. The donor will be required to provide the following information to the mortgage lender:
- The name of the person receiving the gift
- The source of the funds
- The relationship between the donor and the recipient
- The amount of money being gifted
- Confirmation it’s a gift with no expectation of repayment
- Confirmation that the donor won’t get any stake in the property
- Evidence that the donor is financially solvent
Many of the bigger and better-known banks or lenders have a standard form for gifted deposits, which the donor will have to complete and return as a gifted deposit declaration. If a form is not available, then the donor will be required to file a signed and certified gifted deposit letter, which contains all the requisite information.
Additionally, the buyer’s conveyancing solicitor must also be notified of the gifted deposit. The donor may have to provide the solicitor with proof of funds and valid ID documents so that the solicitor in question can satisfy the anti-money laundering regulations.
Donor’s considerations
Depending upon the size of the gifted deposit, it could have implications for the donor’s inheritance tax position. Everyone is allowed to give up to £3000 per annum, tax free. For a couple that is £6,000 per annum. Any unused allowance from a previous year can be added to make a total tax-free gift of £12,000. If the sum is larger than that, then it could have implications for inheritance tax.
There is no limit on the amount of a deposit gift. So, any amount over and above the £12,000 allowance would still be counted as part of the donor’s estate if he or she dies within seven years of making the gift.
The other issue that donors need to be aware of may arise in cases of a gifted deposit from parents and the child buying a property together with a partner or friends. The parents most certainly don’t want the partner or friends to benefit if they split up or fall out. In cases such as this, the donor can ask a solicitor to draw up something called a Deed of Trust, which is a declaration that the gift is for the benefit of their child alone.
Get advice in advance
Whether you’re a first-time buyer who is expecting to receive a deposit gift or a potential donor or parent who is thinking of giving such a gift, it would be wise to see an experienced property solicitor and get sound advice in advance. There are many considerations and implications to be considered and taken into account and these will differ depending upon the circumstances of the case. To be forewarned, is to be forearmed.
For further information and trusted legal advice regarding property, get in touch with us at Carlsons Solicitors.