All you need to know about gifted deposits
A gifted deposit from family can help you massively when buying your first home. But how does it work? What are the legal and tax implications? Read ahead to learn more.
Saving up a large enough deposit for a first home can be a huge challenge, as property prices have risen increasingly out of reach. In some cases, parents will want to step in and lend a hand by gifting money towards the purchase. But what are the rules around large cash gifts to buy a house? Our guide explains the ins and outs of a gifted deposit.
What is a gifted deposit?
A gifted deposit is money given by an individual – usually a family member – to a homebuyer to use as a down payment on a property. It could be used for the whole deposit or just a part of it.
The money isn’t a loan, meaning that a gifted deposit is given with the understanding that the money doesn’t need to be repaid. The person who is gifting the deposit will not be given any stake in the property in return. For example, their name will not appear on the deeds or the mortgage.
How does a gifted deposit work?
With a gifted deposit, the donor gives money to the home-buyer to help purchase the property. This usually pays some – or all – of the cash deposit. There will be some paperwork involved to make sure the transaction is legal. The typical process is as follows:
Agree with your donor (e.g. a parent or close family member) the amount that they are prepared to give you towards the overall deposit.
Add this amount to any savings you already have and make up your full deposit for the property purchase.
When agreeing the mortgage, provide a gifted-deposit letter or fill in the lender’s gifted-deposit form to show the funds are a gift and not a loan. It will explain where the money comes from and that there is no expectation of repayment. Lenders’ criteria for accepting gifted deposits can differ, so speak to your solicitor, mortgage broker, or lender directly.
Once the lender accepts the gifted deposit, the money can be transferred and the purchase completed.
What is a gifted-deposit letter?
A gifted-deposit letter is written proof that your deposit is a gift and not a loan. It certifies who and where the money is coming from, that they can afford the gift, and that the donor won’t demand repayment nor a stake in the property.
Banks and building societies usually have a template gifted-deposit declaration form that can be filled out. Smaller lenders, however, may request a certified letter.
The letter will need to be signed and dated by the gift giver and signed by a witness. It should include the following information:
The name of the person receiving the gift
The relationship between you both
The sum of the gift
Confirmation there is no expectation of repayment
Confirmation there is no requirement for the donor to receive any stake in the property
The donor is financially solvent
The donor will also need to provide some personal documents. These include photo ID, proof of address, and bank statement to comply with anti-money laundering regulations. Your solicitor will also request these documents during the process.
Who can gift a deposit for a mortgage?
A gifted deposit usually comes from parents or grandparents. Although, in theory, anyone could gift a deposit for a mortgage, some lenders have more specific criteria. For example, some are more wary if the deposit comes from a friend or more distant family member. In these cases, the lender may want to carry out more checks, which could slow down the process.
What are the pros and cons of a gifted deposit?
Allows the homebuyer to get on the property ladder sooner, which they may not have been able to do without the cash gift
Helps build a bigger deposit, so that the buyer needs to borrow less on a mortgage. Plus, with a lower loan-to-value (LTV) ratio, the borrower should be able to get a lower mortgage rate
The gifted deposit may be given tax-free
Once the gift it made there is no legal financial tie between the two parties. So, the donor can’t expect the money back
Receiving a gifted deposit from family or friends could be problematic. This is especially true if the buyer falls out with the donor or the donor runs into financial difficulty in the future. That said, if the correct legal paperwork is completed, the donor cannot claim the money back
If the donor passes away within seven years, the gifted deposit could be subject to inheritance tax
Are there any tax implications of a gifted deposit?
It depends. A gifted deposit may be exempt from tax if the donor doesn’t die within the next seven years. If the donor dies within this time frame, it could be counted for Inheritance Tax (IHT) purposes if their estate is worth more than £325,000.
You can accept a £3,000 tax-free gift allowance each year, which is known as your annual exemption. If you were to build up this money into a savings account over several years and use it for all or part of your deposit, you wouldn’t need to declare it to the mortgage lender as a gifted deposit. Neither would it be subject to IHT.
Is there a limit on how much can be gifted?
Unless a lender stipulates otherwise, there is no limit on the size of a gifted deposit you can receive. Again, though, it’s worth keeping in mind that the gift could be subject to inheritance tax if the donor dies within seven years.
Can I add any savings to my gifted deposit?
Yes, you can. If you’re in the position to add personal savings to your gifted deposit, it could be a wise thing to do.
In fact, the bigger the deposit you put down, the better rates you will be offered. Not only that, but you’re also likely to have access to a wider range of mortgage deals.
So, adding any savings to the money you’ve been gifted could be a favourable way to build up your deposit and find the right mortgage for your needs.
What is a ‘deed of trust’?
A ‘deed of trust’ is a document that allows you to protect the money you’ve been gifted. Generally, this can be sorted by your conveyancing solicitor.
For example, if you buy a property with a partner or close friend but things end up going sour, a deed of trust will protect your interests when it comes to your gifted deposit. In fact, this document indicates that the money has been gifted to you specifically, as opposed to both you and your partner (or close friend).
So, should you and your partner part ways, you can be safe in the knowledge that the gifted money you’ve put down will always and only be yours.
What are the alternatives to a gifted deposit?
Lending the money:
This could be an interest-free loan from a family member. However, it should be declared to mortgage lenders who may treat it in the same way as they would a personal loan. So, it will impact your ability to afford the mortgage.
You could nominate a parent (or grandparent) as your mortgage guarantor who can ‘guarantee’ your mortgage should you fall into financial difficulties and be unable to pay. Guarantors need to think carefully about this decision and ideally get independent legal advice. In fact, they need to ensure they can afford the repayments, as this is a big commitment.
This is a tax-efficient government scheme to help people save for their first property, with bonuses paid on savings. If the ISA is not used towards a first-home purchase, the cash can be used in retirement.
You could buy a home with a partner, friend, or even more than one friend. This can help your purchasing power because the earnings of both parties (for a joint mortgage) will be taken into consideration by the lender. Many lenders will lend to more than two people on the same mortgage. However, different terms and conditions will apply, and you’ll also need to get legal advice. Always be confident you are happy to be financially linked to the other people in the mortgage.
Other useful guides
Find out more about first-home purchase and ownership with our detailed guides:
Compare mortgages with MoneySuperMarket
Once you have your deposit in place, comparing mortgages with MoneySuperMarket is straightforward. You can search for a fixed-rate, a tracker, or a discounted-rate mortgage.
We’ll ask you a few questions about your finances and the value of the property you’re looking to buy. Then, you’ll be able to compare mortgage quotes from our panel of leading UK lenders.
You’ll be able to see the results, including the initial interest rate and monthly mortgage repayments. You’ll also see any fees you’ll be asked to pay for each mortgage deal.
Your home is at risk if you do not keep up with the repayments on your mortgage.