When people bring up the topic of saving for a house deposit, it’s usually met with about as much excitement and positivity as a discussion about filing tax returns. Saving for an investment on this scale takes time, planning and discipline for a lot of people but the reality is that there are many people who struggle to believe it’s possible to get onto the property ladder, especially now given the cost of living has added more financial pressure. There is no surprise that gifted deposits are becoming increasingly more common in today’s market as families work together to support each other to start the journey of home ownership. In today’s blog we discuss what gifted deposits are, how they function, as well as explore and the legal and tax implications.
What is a gifted deposit?
A gifted deposit is a cash gift that can be used to pay for either some, or all of a mortgage deposit. Gifted deposits are usually given by relatives or friends. For example, if someone in your family gifts you enough money to take your deposit from 5% to 10%, this could enable you to borrow more, and therefore afford a more expensive home. It is worth noting that some mortgage lenders state in their criteria that any gifted deposits must only be given by immediate family members, some go as far as specifying it must be a parent who gifts the money. You can also receive a gifted deposit from a partner. On the rare occasion when a property is purchased from a parent to their child, some lenders will not accept a gifted deposit from the vendor even if it is between a parent and child.
There are a number of factors to take into account when considering using gifted deposits when purchasing a home, and it is important to understand that it is not as straightforward as transferring money to a family member’s account and calling it a gift. It must be stated in writing, in a Gifted Deposit Letter that the recipient will not have to pay this money back in the future – this is not a loan, and the gift giver cannot have any stake in the home, either.
Do you have to declare a gifted deposit?
Yes you do. Any gift that is used to contribute towards a deposit must be included in the declaration, and accompanied by a declaration and gifted deposit letter to provide information about their independent sources. It is possible to receive multiple gifts for one deposit. The declaration should show that the gifted deposit(s) are not expected to be paid back, otherwise this would be classed as a loan and it could make it harder to be approved for a mortgage.
What are the tax implications of a gifted deposit?
If you receive a gifted deposit from an immediate family member such as a parent or grandparent, it will not be affected by inheritance tax if they live for the next seven years. In the unfortunate event that the gift giver dies within those seven years, the money given will become what is known as a Chargeable Transfer which will likely require an inheritance tax charge. Everyone has a £3,000 gift allowance each year that is exempt from inheritance tax, and any unused allowance can be carried forward into the following year, meaning a parent could gift their child £12,000 without being implicated by inheritance tax, only if they hadn’t gifted any other money to anyone else in the two years previously.
How do I get a mortgage with my gifted deposit?
You’ll need to ensure that your deposit, including the gifted deposit, meets a lender’s requirements before you’re assessed yourself.
In order to help the process along and reduce the need for delay, you’ll need to provide the following information regarding your gifted deposit, and if you are using multiple gifts towards a deposit, then you will need to provide each of the following per gift:
- Gifted Deposit Letter
- Proof of Identification
- Proof of Funds
It’s always important to be aware of the fact that lenders’ lending criteria is subject to change, so we always recommend that you speak with a mortgage advisor to get the most up-to-date and credible information.
We work closely with an independent team of Mortgage Advisors; we can connect you with them to discuss your situation and assist you with your application process. Get in touch with Sims Williams today to get you moving forwards.