Gifted deposits from the Bank of Mum and Dad
Recent data from the Rightmove House Price Index May 2022 showed that the average asking price for a first-time buyer home (two bedrooms or fewer) has reached a new record of £223,117.
This means a solo first-time buyer on the national average full-time salary would need to borrow 4.5 times their income and have a 34% deposit of £74,402. With first-time buyers needing to save a deposit that is 112% higher than a decade ago, it’s no wonder that more and more are turning to the Bank of Mum and Dad for financial support.
Indeed, research from Legal & General showed that more than 56% of first-time buyers aged under 35 received a financial gift, known as a Gifted Deposit to help them step onto the property ladder in 2020. Property lawyer, Alistair Millar from Tallents Solicitors looks at the legal implications to be aware of for all parties involved.
What is a gifted deposit?
Quite simply, this is money given to the purchaser to help them buy a property and it could be part of, or the whole of the deposit.
However, to be classed as a ‘gifted deposit’, the money cannot be a loan with any expectation of being repaid, and the person(s) gifting the money have no rights or legal interest in the property being purchased.
Can anyone make a gifted deposit?
Yes, they can, although the closeness in relationship between the recipient and the donor may be taken into account by the mortgage lender when considering a gifted deposit as part of the mortgage application.
For example, the lender might accept a gifted deposit from an immediate family member, such as a parent, grandparent or sibling, but refuse one from a more distant relative, such as an aunt or uncle, or in some cases, the current owner of the property.
In order to comply with anti-money laundering checks, it is likely that confirmation of the exact source of the funds will be required as well as a statement that it is an outright gift with no strings attached.
What are the pitfalls of a gifted deposit?
From the donor’s point of view, if the recipient is buying a property with another purchaser, then the gifted deposit is considered a gift to them both. However, this might become a point of contention if the relationship later breaks down and the equity in the property has to be divided up. In this case, says Alistair, the donor may wish to enter into a ‘Declaration of Trust’ first which will allow the gifted deposit to be predetermined as part of one homeowner’s equity in the event of a later sale.
Larger gifted deposits (between £3,000 and £6,000 depending on the gifting tax status of the donor) may be subject to inheritance tax if the donor dies within seven years of the gift.
Are there alternatives to gifted deposits?
It may be that standing as a guarantor for the mortgage or applying for the mortgage jointly, might be preferable to a gifted deposit. However, everyone’s situation will be different, so it’s worthwhile speaking to your solicitor early on in the process and getting legal advice relevant to your circumstances.
Please call us on 01636 671881 to book an appointment to discuss your situation in confidence.