These days, many first-time home buyers in the UK need assistance from their parents to step onto the property ladder. According to recent data, the ‘Bank of Mum and Dad’ is set to lend more than £6.5bn in 2017 helping their kids afford their first homes. With parents being involved in more than 25% of UK property transactions, gifting money for a house deposit is a popular option. That said, due to mortgage restrictions, legal rights of individuals and Anti-Money Laundering (AML) laws, all parties involved are required to follow strict legal proceedings.
Here’s what you need to know:
What is a gifted deposit?
A gifted deposit, as the name suggests, is when a family member (or friend) gifts some or all of the deposit money required to secure a property. Gifting money to buy a house should be done the right way, which includes following the right procedures. It also includes obtaining all the necessary legal documents to assure the lenders that the deposit is indeed a gift and not expected to be paid back.
That said, there are some things to consider when it comes to gifted deposit mortgages.
Gifted deposit home loan considerations
- The donor (person gifting the deposit) should understand that they will have no legal rights or interests in the property, although there are circumstances where individuals can receive the money back on the sale of the property. Seeking legal advice before making the commitment is therefore essential.
- The person gifting the money is required to complete a gifted deposit letter, although some lenders may have their own legal forms to complete.
- The lender will ask for various documents from the person gifting the money, including proof of identification, proof of address and possible bank statements to confirm where the gifted money is coming from.
What are the requirements for gifted deposit mortgages?
Firstly, applicants will need proof that the deposit is, in fact, a gift and not a loan or an exchange for rights to the property. This proof can be a simple signed statement from your family member. Some lenders may produce their own legal documents, which makes the process somewhat easier. This statement should include the following information:
- A declaration of assistance to the applicant to buy a home at the stated address
- The amount of the gifted deposit
- That the gift is out of love and kindness
- An understanding that the gift is non-repayable and no rights can be claimed over the property
- A pledge to not hamper the security of the mortgage
- Confirm that all finances are in good standing at the time of signing with no foreseeable financial problems in the future
- Printed name, date and signature
- Signed by a witness/es
A good idea would be to approach the mortgage lender for a legal letter template or speak to a legal professional who may be able to help, although this service could incur extra costs. Furthermore, the solicitor will need proof of identification and address from the donor gifting the deposit money. This information can be verified from the solicitor. Some lenders may also request bank statements from the donor, but this is not always the case.
What about gift money tax?
As either a donor or a receiver, you may be wondering about the implications of cash gift tax. In the UK, a straightforward gift of cash for a house deposit isn’t liable for tax, provided the donor lives for 7 years from the official date of purchase. This is referred to as a ‘potentially exempt transfer’ or PET. If the donor dies within the 7 years and their estate is liable for inheritance tax (IHT), then the applicant may need to pay some or even all of it back. Generally, all residents receive an annual maximum of £3 000 as a gift allowance a year which is not tax deductible. This is known as an annual exemption and does not incur any Inheritance Tax.
Despite the thorough and stringent legal procedure, gifting money for a house deposit is often the easiest option for parents wanting the best for their kids. Ensure that the above advice is adhered to and contact a legal professional for gifted mortgage deposit advice.
For advice on the property market in the UK, get in touch with a Douglas and Gordon expert today.