What parents need to know about helping their children to buy a home
05 September 2023
If your child is currently trying to buy their first home, you’ll likely have heard about the difficulties they may be facing. The impact of the cost-of-living crisis (coupled with rises in rental rates) has been affecting first-time buyers’ ability to save the size of deposit they might need, while the ongoing increases in mortgage rates may mean that their lender will no longer offer the size of loan they were initially expecting.
In short, your child might need more financial support than they first thought, in order to succeed in buying their first property. And that’s where you come in…
The ‘bank of mum and dad’ has always been a popular source to draw on for those who can afford it, to provide grown-up children with the funds to purchase a property, but there are certain strict requirements surrounding ‘gifted deposits’ that both you and the recipient need to abide by – it’s not as straightforward as simply transferring the funds into your child’s bank account.
If you’re thinking of offering this very generous gift to your own children to help them to buy a home, read on to find out everything you need to know about helping your child with their house deposit.
What is a gifted deposit?
A gifted deposit is where a mortgage is supplemented by a deposit that a family member (usually parents or grandparents) has given the money for. The amount can either cover the full deposit or part of it and allows the recipient to get better access to mortgage deals and potentially lower monthly repayments, thereby making daily life more affordable and helping them to get onto the property ladder in the first place.
In the current financial climate, this is a gift that could be truly invaluable to the recipient, who may be struggling to save a large enough deposit to counter the property market and challenging mortgage conditions.
It is important to note that when gifting a deposit, it must be exactly that: a gift. The money cannot be expected to be paid back; if this is the case, it then counts as a loan, and your recipient’s mortgage lender will take this into account when they do their affordability calculations. So be sure that this is money that you can afford to give away freely, without expecting it to be repaid.
Who can give a gifted deposit?
As a rule of thumb, most lenders will only allow a gifted deposit when the money has come from parents, siblings or grandparents. Some lenders insist that only gifts from parents are acceptable. In most instances, gifted deposits from friends or more distant family members are not permitted.
What are the requirements for giving money for a house deposit?
One of the key requirements when you’re giving money for a house deposit is that you must provide a written declaration stating that the money is a gift and is not required to be repaid to you. This declaration will also need to state that the money given doesn’t grant the person gifting any rights to the property.
In the letter, you should include the following details:
- The name of the person receiving the gift
- The amount of money being given
- The source of the funds
- The relationship between the person giving the money and the recipient
- A declaration that the money is a gift with no obligation to repay
- A declaration that the person giving the money has no stake in the property
- A statement that the person gifting the money is of sound mind
- Signatures of the person gifting the money and an impartial witness
If you’re unsure, most mortgage advisors can provide a template letter for you, or you can have your solicitor draw one up at an additional cost.
What documents are needed when gifting a deposit?
As well as the written declaration, the mortgage lender will likely need to see proof of ID from the person gifting the money, including photo ID, proof of address and bank statements, to comply with anti-money laundering regulations.
How much money can be given for a house deposit?
There is no limit on how much money can be provided for a gifted deposit. However, you should bear in mind the rules around inheritance tax when deciding on your final figure, as your child may be liable to pay up to 40% tax on what you give to them under certain circumstances.
Is tax paid on gifted deposits?
You don’t have to pay tax on gifted house deposits. However, the tax-free status only applies providing the person who has given the money doesn’t pass away within seven years of doing so. If they do pass away prior to the seven years, and their estate is worth more than £325,000 (including the amount given for the deposit), then the recipient will be liable to pay inheritance tax, which could be as much as 40%.
Does a gifted deposit need to be declared?
Yes. The recipient will need to inform their mortgage lender and solicitor that their deposit has been wholly or partially gifted to them, and they will need to supply the written declaration outlined above.
Can parents protect a gifted deposit in the event of joint ownership?
If your child is purchasing a property with a partner, you can protect your gift to them by having a solicitor draw up a Deed of Trust, which specifies that the money was given to your child, and not their partner. Therefore, if the couple were to split up, your child will be able to retain ownership of the money you gave to them.