Using a gifted deposit to buy a property
Many people use a gifted deposit – money given by parents or other family members – to help them buy a property. Lianne Priest, Solicitor in Coodes Solicitors’ Residential Property team, outlines the legal considerations and practicalities.
It is not easy to get onto the property ladder, so many people rely on family support to buy their first, or even second or third, home. Whether it’s the bank of mum and dad or a gift from a grandparent, there are some legal considerations if you are getting help to fund your property purchase.
What is a gifted deposit?
A gifted deposit is money, usually given by a family member, that someone uses towards buying a property.
It is important to understand that this is different from being lent money. If the money is a gift, rather than a loan, then it does not need to be repaid. If a gifted deposit is being used to fund a property purchase, the person giving the money must therefore have no expectation of getting it back. The person who gifts the deposit will also have no rights over the property.
What do I need to do if I want to use a gifted deposit?
If you are being given money to help you buy a home, you will need to provide your conveyancer and mortgage lender with a range of evidence and information. People are often surprised that they need to go through additional steps to use a gifted deposit to buy a property. However, these are in place to prevent fraud and the risk of claims against your property in future.
It’s important to tell your conveyancer and your mortgage lender at the earliest possible stage that you have a gifted deposit. That means they can tell you exactly what they need from you and it allows enough time for you to provide them with all the necessary information and evidence.
There are likely to be three requirements from your solicitor and mortgage lender:
1. A letter from the person making the gift.
This will confirm that the money is a gift and the person giving it to you has no rights over the property.
2. ID for the person giving you the gifted deposit.
At Coodes we can make this process very quick and easy because we can use electronic verification. This means the person giving the gift does not need to travel into an office, which is especially helpful if they live in another part of the country or overseas.
3. Confirmation of the source of the funds from the person making the gift.
This is to prove that the funds have come from a legitimate source and is there to prevent money laundering. You may need to provide bank statements and other documents to show where they money has come from. Again, we can use electronic verification for these documents, which can significantly speed up and simplify the process.
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Writing a letter for a gifted deposit
If you are receiving money towards your purchase, the letter should include:
- The full name and address of the person giving the deposit.
- Their relationship to you.
- If there is more than one buyer, the letter should say whether the gift is to all proposed owners.
- Confirmation of the amount being gifted
- Confirmation that this is a gift, not a loan.
- Acknowledgement that there is no requirement for the person gifting the deposit to receive any stake in the property.
- Confirmation that the person gifting the deposit is financially solvent.
The primary purpose of the letter is to provide evidence that the person gifting the deposit will have no beneficial interest in the property and is therefore not entitled to make any future claim.
Meeting your mortgage lender’s requirements
If you have a mortgage, the mortgage lender will want to ensure their charge is protected until it is settled in full when the mortgage is paid off or when the property is sold. If a third party has a loan or a beneficial interest in the property, this could affect the lender’s ability to repossess it.
That is why you must report a gift to your mortgage lender during your mortgage application. If not, your solicitor has to inform your mortgage lender that you are getting a gift once they have received your mortgage offer. Mortgage lenders may then consent to the gift, amend their mortgage offer or rescind it.
Every mortgage lender has its own rules and requirements around gifted deposits. Some are stricter than others. For example, they may have a limit on what proportion of your deposit can come from a gift.
Most mortgage lenders prefer gifted deposits from immediate family members. That is because they are more likely to be genuine gifts, rather than loans.
Speaking to your lender early on will help you to understand their requirements and what you need to do to meet them.
Things to consider before accepting a gifted deposit
Giving money to help a family member buy a property is an extremely generous act. However, before accepting such an offer, it is worth being aware of a few potential issues.
If the person giving you the money becomes bankrupt within five years, the house purchase could be revoked, and the proceeds used to pay off their debt.
If you are gifted money as a deposit from a parent or grandparent, it will be classed as a potentially exempt transfer. This means that, so long as they do not die within the next seven years, it will not be counted for Inheritance Tax (IHT) purposes. However, if the donor dies within seven years however, it will become a chargeable transfer and IHT could be applied. While no one would want to think about this outcome, it is important to be aware of the implications. Therefore, it would be wise to get tax advice ahead of accepting the gift.
Gifted deposits can be vital for many people who would otherwise only be able to dream of owning their own home. Receiving money from a family member may be the key to you finally getting a foot on the property ladder. However, if you are using a gifted deposit to buy a property make sure you understand what is involved. Most importantly of all, tell your conveyancer and mortgage lender about the gift as soon as possible.