With house prices continuing to rise, finding the deposit to buy a property can be a challenge, especially if you are a first time buyer. It might be that you are fortunate enough to be in a position to ask a family member to help you out by giving you a money towards a deposit.

What is a gifted deposit?

This is money given to you by a family member (usually a parent or grandparent) towards your deposit for a house with no expectation that it will be paid back. Usually this is made from their savings or by raising equity from their own property, but sometimes it may be an early inheritance gift.

This financial gift is made knowing that they will not have any share of or legal interest in the property it is being used to buy. Alternatively, they may loan the deposit to you, but this may have implications on how much you are able to borrow, as the repayment costs would affect your affordability.

As most first time buyers claim that finding the money for a deposit is their biggest issue when buying a home, it is becoming more common for family members to provide some sort of financial help with this. With average deposits getting close to £50,000, it’s hardly surprising.

Not being able to save a decent amount towards a property purchase could leave you quite literally paying for it for many years to come as the higher the loan to value is (the percentage borrowed against the cost of the property), the higher the interest rates will be. While there are 95% loans available, the interest rates on these can be almost twice as much as loans where the deposit is bigger. Therefore, having someone give you a little extra to bring the loan size down can make a massive difference to the amount you will pay each month.

How Does it Work?

Accepting a financial gift for a home purchase should be carefully considered by both parties as it is not as simple as giving someone some money as you might for a birthday.

Firstly, not all lenders will accept a gift towards a deposit and those that do may have criteria you must adhere to. For example, it is not uncommon for the lender to expect the applicant to be able to contribute at least 5% of their deposit from their own savings. Lenders that do accept them will offer you the same mortgage deal as anyone else could get with the same value deposit – there are no specialist ‘gifted deposit’ mortgages.

Another important consideration is who the money is coming from. As mentioned above, most commonly, the deposit is gifted by a parent/parents or grandparents, or occasionally siblings. However, once you start moving to less immediate relatives, banks can be more cautious in accepting it.

Essentially, you need to be able to demonstrate that it really is a gift and that the donor has no ulterior motive to make a claim on the property later which can be very difficult to prove.

The lender is also unlikely to accept a gift from the owner of the property you are planning to buy – this usually happens if you’re buying from a friend or family member.

Tax

There are also tax implications for both the person giving you the money, and for you in receiving it. If the gift is quite large, it may be subject to inheritance tax.

Someone can give away up to £3,000 a year (or £6,000 the following year if nothing was given the previous year), without it being subject to inheritance tax. Therefore, you could potentially receive a gift of £6,000 from each parent without the potential tax liability. Once the amount exceeds this, should the donor die within seven years of giving you the money, it would then be classed as part of their estate and is counted in its overall value, which if it totals more than £325,000, would then make it subject to 40% tax. Your donor should consult their accountant to clarify the tax implications of the gift.

Before accepting the gift, have a conversation about the specifics to ensure everyone is clear about how it will work. You may want to discuss how much they will give you and what they expect you to spend it on, if they are expecting it to be repaid, either now, or in the future and if they will charge any interest on this.

The person giving you the money may also want to consider what would happen to their gift if you are buying a home with a partner and then split up. They may want to ensure that you keep the entire share of it. In these circumstances, it is wise to discuss your options with a solicitor to draw up a legal agreement – and may be worth doing so anyway just to ensure that there are no misunderstandings, either now or later on.

Who to Notify

If you do decide to accept the gift, you should let your lender and solicitor know immediately as you will be required to provide further evidence to support the income and as part of their money laundering checks. The lender will require a signed letter to confirm that the donor is not going to want the money back and that waives any legal interest in the property.

The lender may have a template you can use, but essentially the letter should be signed by the donor in the presence of a witness and should also contain the following information:

The lender and solicitor will also want to see proof of ID and address and may want to see bank statements that show the source of the money and it being transferred into your account.