If we’ve said it once, we’ve said it 1,000 times: but saving up for a house deposit is probably the biggest financial challenge for people trying to get on the property ladder. And with property prices and living costs being what they are, lots of people need a helping hand from their family to save enough. It’s this financial help that is known as a gifted deposit.

If only things were so simple. Today, we’ll explain everything you need to know about using a gifted deposit in the UK. We’ll cover what it is, who can give one, the crucial paperwork you’ll need and the rules you need to be aware of as you plan your purchase.

 

 

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What is a Gifted Deposit?

Put simply, a gifted deposit is any sum of money given to a homebuyer by a third party to help them purchase a property. The crucial word here is “gift”.

This means the money is given with no expectation of it ever being repaid and the person giving the money will have no legal stake or ownership interest in the property you buy.

This is the key difference between a gift and a loan, which would have to be repaid and would affect your mortgage affordability.

Check out our guide – how much mortgage can I afford?

Who Can Give a Gifted Deposit?

In theory anyone can give you a gift. But the reality is that most mortgage lenders have specific rules about who they will accept a gifted deposit from. This is because they are always looking to minimise any potential risk or complications.

As a general rule of thumb, lenders are most comfortable accepting gifts from close family members. This usually includes:

  • Parents or Grandparents
  • Other Close Relatives (including siblings, aunts, uncles etc).

Gifts from more distant relatives, family friends or an employer are less likely to be accepted by mainstream lenders, as they can complicate the application. Basically. it’s always best to check your chosen lender’s specific policy.

The All-Important Gifted Deposit Letter

This is a non-negotiable part of the process. Your lender and your conveyancer will require a formal signed letter from every person who is gifting you money. This letter serves as legal proof of the nature of the funds.

What Must the Gifted Deposit Letter Include?

The letter needs to be clear and contain specific information to satisfy the lender. Here’s a checklist of what it should include:

  1. The gifter’s full name, address and relationship to you
  2. Your full name
  3. The exact sum of money being gifted
  4. A clear unambiguous statement that the money is an unconditional and non-refundable gift and is not a loan
  5. A statement confirming the person gifting the money will hold no legal charge or ownership interest in the property being purchased.
  6. The letter must be signed and dated by the gift-giver.

Your solicitor or conveyancer can often provide a template for this letter. Making sure you have this document ready is a key part of using a gifted deposit.

What Other Proof Do You Need?

As part of standard anti-money laundering regulations your solicitor and lender will need to verify where the funds have come from. As a result, you should be prepared for the person gifting you the money to provide:

  • Proof of their identity such as a valid passport or driving licence
  • Proof of their address like a recent utility bill
  • Proof of funds (usually bank statements for the last 3-6 months showing the gifted amount in their account and demonstrating that the funds are from a legitimate source)

Potential Tax Implications to Consider

While receiving a gift isn’t usually taxable for the recipient, there is one major consideration for the person giving the gift: Inheritance Tax (IHT).

Inheritance Tax (IHT) and the “7-Year Rule”

If the person who gifted you the deposit passes away within seven years of making the gift, the amount could be considered part of their estate for Inheritance Tax purposes. This is a complex area and how much tax might be due depends on the size of their estate and how long before their passing the gift was made.

There are annual exemptions (currently £3,000 per person per year) that can be gifted without being considered for IHT. It is highly recommended that anyone giving or receiving a large gifted deposit seeks independent financial or tax advice to understand any potential IHT implications.

How Does a Gifted Deposit Affect Your Mortgage Application?

As long as it’s from an acceptable source and properly declared and documented, a gifted deposit is viewed very positively by most lenders. It can significantly strengthen your application by:

  • Letting you to save a larger deposit than you could on your own.
  • Helping you access lower Loan-to-Value (LTV) bands which often come with better interest rates.
  • Demonstrating a stable support network which can be viewed favourably.

Despite this, always remember that the mortgage applicant still needs to meet all the lender’s other standard eligibility criteria, including income affordability checks and having a good credit history. A gift helps with the deposit but not the monthly repayments.

Find out more with our guide – am I eligible for a mortgage?

OneDome is here to help

Choosing a mortgage is complex but OneDome is here to help. If you have any questions about the specifics of mortgages, the wider mortgage process or want tailored advice on the different types of mortgages that suit your situation you can:

Important: Your home may be repossessed if you do not keep up repayments on your mortgage.