Gifted Deposit Mortgage 

Do you have to pay tax on a gifted deposit?

I’m not a tax professional, so any comments I make on this are not in an advisery capacity. Listeners should speak to a suitably qualified professional to find out the answer, as each person’s tax position may vary.

As far as I’m aware, there isn’t any tax payable on a gifted deposit, but please do seek advice on whether anything would apply to you.

What will happen if a gifted deposit is not declared?

It will always come out into the open at some point in your purchase. Not declaring the source of your deposit will cause delays further down the line, as one of a solicitor’s obligations for money laundering regulations is to verify any origin of the funds being used for the deposit.

They will require proof and bank statements going back over a certain period of time. Not declaring it will then cause you more work further down the line. The solicitor reports back to the mortgage lender, which could then cause further delays – even post-mortgage offer.

The lender, quite rightly, might feel that they weren’t given all the correct information at the point of the application. That could put your application in jeopardy.

If there is a gifted deposit, speak to your adviser about that, because it’s not going to disadvantage you at all with regards to your mortgage.

How do solicitors check the source of funds?

They’ll check the origin of the deposit. If it’s from savings, they’ll get statements. If it’s from a property sale, they may need proof of ownership of the property and details of the sale. There are many different sources for a deposit, so it will vary on a case-by-case basis.

Ultimately, solicitors and ourselves as advisers would make sure we feel comfortable about the origin of the funds. We’ll check it’s all above board so that the mortgage lender will accept it.

What is the seven-year rule for gifted deposits?

As I mentioned before, I’m not a tax specialist, so none of this should be taken as tax advice. Listeners should seek their own advice from a relevant tax professional.

The seven-year rule refers to inheritance tax, where any gifts that are given may have an inheritance tax liability if the donors of the gift were to die within seven years of making it. Do look into that and find out whether that’s relevant to you.

It’s very important that donors of a gifted deposit are aware of all of these factors. Make sure they are comfortable with all of the risks and whether they need to make any allowances.

What is the alternative to a gifted deposit?

The main alternative is using savings instead of a gifted deposit. There aren’t any schemes currently, like the old Help to Buy on new builds.

One alternative could be gifted equity. That’s where someone has a property to sell and wants to keep it within their family, but can’t donate the funds as a gifted deposit. Instead, they can gift the equity – the value of the property.

It’s a rather niche alternative, but there aren’t many alternative forms of deposit other than your own funds.

What are the pros and cons of a gifted deposit?

The main benefit of a gifted deposit is that it’s treated exactly the same as a standard deposit, and will reduce how much you need to borrow on a mortgage. That means a lower interest rate and lower monthly repayments – essentially saving you a fortune in the long-run.

It could also mean that you could borrow a little bit more. Lenders allow more flexibility in their lending decisions if you’re lucky enough to have a larger deposit. You could also qualify for a better Loan to Value ratio on your purchase.

A possible disadvantage is that if there are other concerns around your application, like bad credit or anything else a lender isn’t happy with, having your deposit wholly gifted to you could be perceived in a negative way.

On low deposit mortgages, where you can buy a home with 5% of the purchase price, some lenders require that 5% to be your own saved funds and not a gifted deposit. Not many lenders do this, but it’s something to be aware of.

Other than that, I would say the pros significantly outweigh the cons with a gifted deposit. That said, it’s also important to consider the tax side of things for the donors of the gift.

You’ve demonstrated how a mortgage broker can help. Is there anything else you’d like to add?

The main message here is to speak to a mortgage professional. Lenders each have their own rules and they’re all different. What may work with one lender may not work with another.

Also, make sure you get all the paperwork upfront and know what you need to provide, especially if you’re asking parents or grandparents to share sensitive personal information for your mortgage application.

A broker can help explain and support that process. By making them aware of what’s required we can hopefully avoid any surprises down the line. If they don’t want to provide the information when it’s needed, it could hold your purchase up. It’s so important to know what’s required.

As always, get in touch if you have any questions or if we can help you with anything mortgage-related.

Key Takeaways:

• A gifted deposit is money given to a buyer that comes from a third party (not the buyer’s own savings). It requires a declaration confirming it’s a true gift, and is not repayable.
• Most mortgage lenders accept gifted deposits and will not restrict the list of available lenders.
• Lenders typically require a letter or declaration from the donor stating their name, address, relationship to the buyer, confirming the money is a gift with no repayment or interest expected, and that the donor will not live in the property.
• While immediate family (parents, siblings, grandparents) are commonly accepted, some lenders will also accept extended family members or even non-family members, as long as the support makes sense for the application.
• Not declaring a gifted deposit will cause delays, as solicitors must verify the source of funds for money laundering regulations. Donors should also be aware of the ‘seven-year rule’ related to potential inheritance tax liability, and buyers should seek professional tax advice.
  
  

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

There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances.

The fee is up to 1%, but a typical fee is 0.3% of the amount borrowed.

For specialist tax advice, please refer to an accountant or tax specialist.