What is a Gifted Deposit?

Can you use a Gift as a deposit?

Can you use Gift from your Parents as a Deposit?

Here’s some guidance as to a real option available to parents and close relatives (usually, sometimes friends) to help their children/nephews/nieces etc. raise the funds required for a deposit when purchasing a home, namely a gifted deposit.

Gifted deposits are very helpful to first-time buyers, given that the sums required to complete a purchase on a property with the help of a typical mortgage are generally out of reach for many of the UK’s potential homeowners.

For many first-time buyers, a 10% deposit on the property is an assumed requirement from mortgage lenders although at times mortgages with 5% deposits can be obtained,  it varies generally dependent on market conditions.

In fact, the latest data from the UK’s House Price Index reports that the average house price in Britain, as of July 2023 stands at £260,828, which equates to a £26,082 deposit (based on a typical first-time buyer 90% LTV mortgage).

These deposit funds are often, no matter how hard you save, out of reach for a large number of first-time buyers, and this is where gifted deposits can offer a realistic solution to help achieve that challenging first step onto the property ladder.

So, what is a gifted deposit?

A gifted deposit is when an individual – usually a family member – gives a homebuyer a contribution towards their deposit (often referred to as ‘the bank of mum and dad’). This could be a percentage of the overall deposit required or it could be for the full amount – the point being that it is considered a gift intended to help the buyer. The individuals gifting the money will also have no share in the property in return for gifting the money.

By way of example, if Mum and Dad (the giftors) want equity in the property in exchange for their gift, or they want their money back at some point (a repayable loan), this isn’t a gift and wouldn’t qualify.  It must be a non repayable gift,  with no instalments repayable and the giftor having no stake in the property.

For the absolute avoidance of doubt, the emphasis is on the word ‘gifted’ because the money is given without the expectation of it being paid back as you would with a loan. It is a present.

Gifted deposits: What are the benefits?

The simplest benefit is having the money necessary to buy a house without the need to save for it. It’s also tax-free (see below for more information on this).

But in real terms, the bigger your deposit towards the overall purchase price, the wider the range of mortgage products and offers available as your loan to value is lower ie. The money you borrow against the value of the property worked out as a percentage. This can mean saving literally thousands of pounds over the lifetime of your mortgage.

There is a definite financial benefit putting down a larger deposit if you (or more specifically the person giving the gift) can afford to.

Who can gift a deposit for a mortgage?

Essentially anyone can make a gift to a property purchase, but in the vast majority of cases, it’s immediate family members (parents or grandparents) that gift money towards a deposit. Though it is possible, buyers should be aware that lenders are not as keen with more distant relatives such as aunts and uncles or even friends.

How does a gifted deposit work?

The process of gifting the money is the same as any other financial transaction in the UK nowadays with individuals gifting the money needing to provide evidence of the source of their funds as well as make them available and ready for your conveyancer at the point of exchange of contracts, when deposits are secured, and the property transaction becomes legally binding.

Money laundering is a big risk in property purchases, especially when money is passed between individuals not directly tied to the property transaction, hence the checks.

As such, if you are receiving a gifted deposit for your purchase, you should inform your Conveyancer as well as your mortgage lender as soon as possible to allow them time to conduct the relevant anti-money laundering checks.

What you’ll need to provide to your Conveyancer

• Gifted Deposit letter

First of all, you will need to provide a ‘gifted deposit’ letter to your lender. This is your proof that your deposit is a gift and not a loan and is signed by the person giving you the money, also confirming their require no stake in the property.

A typical gifted deposit letter will contain the following details:

• The name of the person receiving the gift
• The relationship between you both
• The amount of the gift
• Confirmation there is no requirement for repayment, it’s not a loan
• Confirmation there is no requirement for the giftor to receive any stake in the property
• Confirmation that the person gifting the deposit is financially solvent – effectively ensuring that the money will be available when required to complete the purchase of the property.
• The letter should be signed and dated by the person gifting the deposit.

• Proof of identity documents to your lender and conveyancer

In addition to the gifted deposit letter, the person that is gifting you the mortgage deposit will need to provide the mortgage lender with documents confirming their identity. These will be confirmed by the lender, but typically they are as follows:
• Photo ID
• Proof of address
• Bank statements
It is necessary to supply these documents to comply with anti-money laundering regulations. Your Conveyancer will also request similar documents for the same purpose.

• Proof of funds to your conveyancer

Your Conveyancer is legally obliged to confirm the source of the gifted funds. More often than not this is fairly straightforward with proof from the likes of bank statements, but in instances where the money originates from other sources (such as some overseas banks, companies or cash deposits) the process can become much more complex.

Gifted Deposits: ‘Deed of Trust’ – a real consideration

If entering the house buying process with a partner whether as friends or a couple, it is worth considering having your conveyancer draw up a ‘Deed of Trust’.

If friends or couples are buying a property together, the reality is that sometimes relationships don’t work out, or one of you could pass away unexpectantly. A Deed of Trust will state how the equity in the house is divided if things don’t work out as planned.

This is particularly relevant for gifted deposits, as in the event of a gifted deposit coming from one party’s family, the deed could outline that the deposit amount from the sale is returned to the person whose family gifted the money before any further equity is divided by both parties.

Do you have to pay tax on gifted deposits?

Essentially, no. Gifted deposits are tax free.

If the money is gifted from your immediate family, it will be classed as a Potentially Exempt Transfer. This means you don’t need to declare it as income, and therefore would not attract the usual taxes, and, as long as the donor doesn’t die within seven years of donating the funds, it will not be subject to inheritance tax (IHT).

Here at JM Conveyancing, we can help you with all of your conveyancing needs for your property move and regularly deal with gifted deposits. Just click to link here for your free instant quote