Buying a new house can be a pretty big investment and a very long-term commitment. To buy a property, you need to start saving for a deposit months before you even start looking at properties. And, of course, you need to have enough money to pay the monthly mortgage. In recent times, parents and family members have started using gifted house deposits to help their loved ones buy a property. Thanks to gifted house deposits, the young generation no longer needs to worry or wonder, how much is my house worth? Here is everything that you need to know about gifted house deposits.
What is a gifted house deposit?
As the name suggests, an individual can give potential homebuyer money to buy a property. This could be the full payment or partial payment, depending on the amount of the gifted deposit. Unlike loans, a gifted deposit is given with an understanding that the deposit amount does not need to be paid back. In simple words, the money has to be a gift, and not a loan.
Who can gift a house deposit?
Technically, any person can give you a gifted house deposit. It could be a parent, a grandparent, an aunt or uncle, a distant relative, a friend or even a co-worker. However, most lenders in the UK do have certain stipulations about who can and who cannot give you a deposit as a gift. One of the most accepted and trusted forms of a gifted house deposit is money given by the homeowner’s parents. Money or deposits given by immediate family members such as siblings or grandparents is also allowed by most lenders. Depending on the bank or the lender, a deposit gifted by a relative or a distant cousin might or might not be accepted. A gifted deposit from a friend or a co-worker will most likely not be accepted, as lenders feel that the individual who is gifting the deposit might want to claim the property in the future.
As a rule of thumb, potential homeowners should always check with their banks and lenders before accepting a gifted deposit. Usually, a gifted deposit from a parent will be accepted by most lenders, but it is always a good idea to confirm whether or not your bank will accept the gifted deposit for a mortgage.
How can you gift someone a deposit?
There are quite a few ways to gift a deposit to someone. The most common way is to do a bank transfer where the person gifting the deposit can transfer funds to the giftee’s account. Also, an individual can withdraw funds from their pension to transfer the funds.
Is there anything I need to consider before accepting a gifted deposit?
The one thing homeowners must keep in mind before accepting a gifted deposit is the inheritance tax. If the person who has gifted a full or partial deposit dies within 7 years of giving the funds, then the entire deposit amount could be subject to inheritance tax. Essentially, whether or not inheritance tax will be applicable on the deposit amount is based on the size of the deceased’s estate. If the estate is worth more than £325,000, including the gifted amount, then the homeowner will have to pay an inheritance tax. The tax payable could be up to 40 per cent. However, as the 7 year time limit passes, the inheritance tax decreases.
What do I need to show the bank when I have received a gifted deposit?
The person who is providing the gifted deposit has to sign a declaration that these funds are to be treated as a gift, which means the individual has no financial interest in the property and that the deposit amount is not to be repaid. They will have to give a letter stating their name, the name of the applicant and the relationship. The sum of the gift along with the source of the funds must be mentioned. Some banks might even ask for a bank statement to show as proof of the fund transfer.
What is the alternative to a gifted deposit? If your parents or relatives want to help you buy a house, then there are quite a few options available. Consider taking out a joint mortgage with your parents as you might have a higher chance of getting accepted. You could also opt for a guarantor mortgage or a family offset mortgage. Otherwise, you can speak to your bank or lender to find out what mortgage options are available for you.