Gifted Deposits Explained
Saving a deposit for a house is one of the biggest hurdles for first-time buyers, so it's no surprise that gifted deposits are a common feature of buying a home. Find out what gifted deposits are, how they work and the legal and tax implications
House prices are at such a high level that the average deposit required by first-time buyers has increased significantly over the years. According to Halifax, the average deposit first-time buyers paid in 2021 was almost £59,000. For many people, saving this amount of money is unachievable. Which is why so many aspiring homeowners look for financial help, in the form of gifted deposits, to help boost their savings and get a step on the property ladder.
What is a gifted deposit?
A “gifted deposit” refers to money given to a homebuyer to help them buy a property. The amount of money gifted can be a contribution towards the deposit or equate to the whole deposit. However, it’s not as straight-forward as a parent simply transferring the money into a child’s account and saying it’s a gift. There are a number of factors to consider which we outline below.
Why is a bigger deposit better?
A deposit of 5% is usually the minimum a mortgage lender will require. But the bigger your deposit, the better off you are because:
- you won’t need to borrow as much, which means your monthly mortgage repayments will be cheaper
- you can access a wider choice of cheaper mortgage products.
So even if you have saved enough for a deposit to buy your first home, you can benefit from a gifted deposit top-up. For example if you have a 25% deposit, rather than a 10% deposit, your mortgage payments will be more affordable.
How do gifted deposits work?
Gifted deposits are just that – gifted. Unlike a loan, they are given with the understanding that the money doesn’t need to be repaid. The person gifting the money has no rights or legal interest in the property being purchased. If parents are considering ways to help their children get on the property ladder, a gifted deposit can be the easiest way.
Get fee free mortgage advice from our partners at L&C. Use the online mortgage finder or speak to an advisor today.
Who can gift a deposit for a mortgage?
Most mortgage lenders prefer it if the person gifting you the money is an immediate relative, such as a parent, grandparent or sibling. You can also receive a gifted deposit from a partner. But more distant relatives such as aunts and uncles, or friends, may not be allowed. Other lenders’ lending criteria may state it must be a parent who gifts the money.
Most lenders won’t accept a gifted deposit if the person giving the money is the vendor – the person selling the house. It may seem like an unlikely prospect but it could be a problem if you’re buying a house from your parents or another family member.
How do you get a mortgage with a gifted deposit?
If you’re expecting a gifted deposit, it’s a good idea to talk through your options with our mortgage brokers L&C as they will know what different lender rules apply and can help you find the best mortgage deal.
You will also need to inform your conveyancing solicitor that you are buying with a gifted deposit.
Do you have to declare gifted deposits?
Yes. You’ll need to inform your mortgage lender and your solicitor that your deposit has been gifted as part of their anti-money laundering checks.
What is a gifted deposit declaration or letter?
If you receive a gifted deposit, your lender may require whoever is gifting you the money to sign a ‘Gifted Deposit Letter’. This will need to include:
- The name of the person receiving the gift
- The source of the funds
- The relationship between the person gifting and receiving
- The amount of money
- Confirmation it’s a gift with no expectation of repayment
- Confirmation the person giving the gift won’t get any stake in the property
- Evidence the person gifting the money is financially solvent
Bigger banks and building societies will usually have a gifted deposit declaration form that can be filled out. But smaller lenders may request a signed and certified letter. However, if you’re unsure about your letter, it’s a good idea to speak to your mortgage broker who’ll be able to advise you.
Does the person gifting the money need to provide anything else?
The person gifting you the deposit will also need to provide:
- Proof of funds: If the money being gifted comes from an expected source, such as the sale of a home, this is easy to prove. If the money has been saved up over time, multiple bank statements may be needed to be supplied to your solicitor to meet the anti-money laundering checks.
- Proof of ID: The family member or friend gifting the money will need to show photo ID, such as their passport. Plus, they’ll need to provide two proofs of address.
Can the deposit be loaned instead of gifted?
Mortgage lenders view gifted deposits and loaned deposits as completely different things. A bank may accept a loaned deposit, provided there’s a signed declaration that it will only need to be repaid when the property is sold. If that’s not the case, they will view the loan as a financial commitment, like a credit card. So it will factor in the planned repayments when assessing the buyer’s affordability.
How big can gifted deposits be?
There is no limit on how large a gifted deposit you receive can be, unless a lender stipulates this. But bear in mind the gift could be subject to inheritance tax.
What are the rules on gifted deposits and inheritance tax?
If you’re lucky enough to be offered a large gifted deposit, you should consider the implications of inheritance tax. Everyone is allowed to give away up to £3000 per year, exempt from inheritance tax. Any unused allowance can be carried over from the previous year. So parents could gift their child £12,000 without inheritance tax being an issue. This is provided they haven’t gifted any other money to anyone in the two years previously. But if the amount is bigger than that or if the person giving the money doesn’t have the full annual inheritance tax allowance, the money could be liable for inheritance tax.
This is because if the person gifting the money dies within seven years of handing it over it would still be classed as part of their estate for inheritance tax purposes. So if their total estate, including the gift, is worth more than £325,000 then up to 40% tax would be due on the excess. And the amount of tax due on the gift decreases as the seven years elapse.
To find out more, read our guide How to keep on top of inheritance tax
If I get a gifted deposit, can I add my own savings to it?
Absolutely. The bigger the deposit you can raise, the more affordable your repayments will be and the greater the range of mortgages you’ll usually have access to. As mentioned above, you may get access to better rates too, especially if you can save enough to get to a key threshold, such as a 15% or 20% deposit.
How can parents protect a house deposit gift?
If you’re gifting your child a deposit and they’re buying a property with their partner or friend, you can protect the money you have gifted in the event they split up with a declaration of trust, or deed of trust. This can be drawn up by the solicitor working on the property. It will state who the money was given to – this allows you to specify that you gifted it to your chid and not to them and their partner. So if the couple split up, it will make sure your child keeps ownership of the money you gifted.
It can also clarify whether the money is a gift or a loan. And if it’s a loan, when it needs to be paid back. A deed of trust can also be used by the people buying the property to set out responsibilities for outgoings and what will happen to the property if they break up. However, if your child goes on to marry the person they bought the home with this could affect the deed of trust.
Ways to fund a gifted deposit
Some homeowners choose to use equity release to allow them to unlock cash from their home for a gift. But this can be an expensive commitment and you should consider it carefully, taking independent financial advice. The same can be said for anyone considering accessing money from their savings or pension to gift to a child.
Alternatives to gifted deposits
And if your parents or family want to help you but can’t afford to gift you money, there are still ways they can help you with your purchase. Such as:
Family Springboard Mortgages: With these mortgages, a family member or friend puts a deposit on the property on your behalf, typically 10%, into a savings account. This account is linked to the mortgage you can then take out on the property. Your loved one will have to agree to leave the money in the account for a set period of time. And they can earn interest on the money they’ve put down. But, if you miss any payments, it may take longer for your loved one to get their money back. And they may not get their full savings and interest back. Read if it’s right for you in our offset mortgages guide
Guarantor mortgages: With guarantor mortgages, your family member or friend agrees to guarantee to make the repayments on your mortgage should you fall behind. But if you’re a guarantor there are risks to consider; if the person you’re the guarantor for miss repayments you may risk losing your savings or even your home.
Take out a joint mortgage: You could buy a home with your child and take out a joint mortgage. This would make you equally liable for the repayment of the loan. One advantage is that your combined incomes may mean you can afford to take out a larger loan. However, one major drawback is if you already own a property, then the new home you buy with your child would count as a second home. This means there would be an additional 3% stamp duty due, which could make the property significantly more expensive. Also, if it’s your second home and you’re still on the mortgage when the house is sold, you may be liable for capital gains tax. Some lenders allow you to take on a joint mortgage, but your name doesn’t have to be added to the property’s title deeds. This allows you to get around these tax issues.
With all of these options it’s important to get advice before making any decisions.
Are gifted deposits that common?
It seems not everyone is lucky enough or perhaps wants to accept financial help. According to the English Housing Survey 2019-2020, most first time buyers (85%) funded the purchase of their first home with savings, but 28% reported receiving help from family or friends while 6% used an inheritance as a source of deposit.
Between 2017-18 and 2019-20, the proportion of first time buyers using savings to purchase their first home increased (from 76% to 85%), whereas the proportion receiving a gift or loan from family or friends decreased from 39% to 28% over the same period.
The graph below shows the source of deposit for recent first time buyers, 1995-96, 2005-06, 2017- 18, 2018-19 and 2019-20.
Do lenders have to allow gifted deposits?
No. Lenders can rule out gifted deposits.
During the height of the COVID-19 pandemic, when the economic climate was uncertain and lenders became very risk averse, some lenders restricted the use of gifted deposits. For example, Nationwide launched a 90% LTV mortgage, and stipulated that buyers would need to prove at least 75% of their deposit came from their own savings. This capped the amount of money buyers could use from gifted deposits. But Nationwide has since relaxed its rules. And gifted deposits are now widely accepted again by lenders. However, as lenders’ lending criteria is subject to change, it’s always a wise move to speak to a mortgage broker to get the most up-to-date information.