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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 2022 was almost £62,500. 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.
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.
In terms of how much deposit you need to buy a house, a deposit of 5% is usually the minimum a mortgage lender will require. But the bigger your deposit, the better off you are because:
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.
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.
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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.
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.
Yes, you must declare any gifts you use for your deposit to your mortgage. To avoid additional undisclosed debt, lenders need to ensure the money is a gift, not a loan. The person gifting the money may also need to provide bank statements to show the origin of the funds, as part of anti-money laundering checks.
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:
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.
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The person gifting you the deposit will also need to provide:
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.
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.
In the UK, gifted deposits are generally tax-free. 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. However, for larger gifts or if the gifter doesn’t have the full annual inheritance tax allowance and passes away within seven years of the gift, it may be subject to inheritance tax. It’s always advisable to consult an Independent Financial Adviser for tailored advice.
To find out more, read our guide How to keep on top of inheritance tax
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.
If you’re gifting your child a deposit and they’re buying a property with their partner or buying with friends, 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 conveyancing solicitor working on the property purchase. 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.
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.
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, particularly if you are trying to get a mortgage with no deposit. 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 mortgage advice before making any decisions.
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.
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.
Want to buy a home with a gifted deposit? Get fee-free advice from award-winning mortgage brokers L&C. They’re available seven days a week and can talk you through everything you need to know.
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