With house prices continuing to make buying a first home difficult, many people are given money towards the purchase by parents and other close relatives. When using a gifted deposit there are a number of steps to go through to satisfy lender and other legal requirements. You should also consider the legal implications of a gifted deposit, such as the effect on potential Inheritance Tax and how to protect money from the breakdown of a relationship.
Being given money towards purchasing a property can be a big advantage, allowing you to buy a more expensive property and take advantage of better mortgage deals. It is important for both the person giving the money and the recipient to understand the implications however.
What is a gifted deposit?
A gifted deposit is a sum of money given to someone towards the purchase of a property with no expectation that it will be paid back. The mortgage lender will need to be satisfied that it is a gift and not a loan.
Who can give a gifted deposit?
A gifted deposit is generally given by parents or grandparents. Mortgage lenders may also accept gifts from other close relatives such as uncles, aunts, step parents or siblings.
Obtaining the mortgage lender’s consent to a gifted deposit
Your mortgage lender must be advised that there is a gifted element to the deposit and will need to give their consent. Not all lenders accept gifted deposits, so you will need to check this before making a mortgage application.
They will have a set of rules and restrictions which must be observed and a set process for you and your solicitor to go through before you can proceed. This will generally require the donor to sign a gifted deposit letter confirming the money is a gift. Identity and bankruptcy checks will also need to be carried out and your solicitor will be required by law to do anti-money laundering checks in respect of the donor.
Inheritance Tax implications and gifted deposits
There can be Inheritance Tax implications when money is given away. If the person giving the money were to die within seven years of making the gift, then the amount given will be included in their estate for Inheritance Tax purposes. If their estate is over the threshold for payment of this tax, then Inheritance Tax will be payable on a sliding scale, depending how long ago the gift was given.
Gifts totalling £3,000 per year can be made without attracting Inheritance Tax and this allowance can be carried forward for one year only, making a total exemption of £6,000.
How to protect a gifted deposit
If the property that is being purchased is to be jointly owned, then the donor should consider how their gift will be protected, should the relationship end. This can be done by having a trust deed drawn up, specifying what share in the property each owner holds and how sale proceeds will be shared.
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