Gifted deposits: what you need to know
A gifted deposit is an amount of money that is typically given by one member of family to another (but can be from anyone from a friend to an employer) with the aim of forming all or at least part of the money needed for a deposit on a home.
This sounds like a straightforward process, but due to anti-money laundering laws, things can get quite complicated, especially if the money is coming from outside of the UK. There are three main steps you need to know about and follow to receive a gifted deposit:
1. You need to formally confirm that the deposit is a gift
The person making the gift needs to send the recipient a letter that confirms that the money you have provided is a gifted deposit. You also need to state in the letter that you have no rights over the property and remember to sign it along with your name spelled out underneath your signature.
The person you are making the gifted deposit to then needs to pass a copy of the letter to their conveyancing solicitor. This is a crucial step (even more so if the recipient needs to take out a mortgage) because the solicitor needs to be able to prove that the person making the gift has no legal claim to the property and that you are indeed giving the money as a gift and never expect to have it back at a later date. This is so important because mortgage lenders can be concerned that a parent/grandparent may at a later date claim that the money was in fact just a loan and was never intended as a gift.
In fact, when the person that’s applying for a mortgage makes their application, they must let the lender know about the gifted deposit. If they fail to do this then the mortgage offer will need to be revised, which may delay things. Some lenders may even decide to decline the application if they are concerned about gifted deposits in general, so it is essential that you tell any potential lender upfront about the gifted deposit in case there are any objections.
2. Those making the gifted deposit need to provide ID and proof of address
Due to anti-money laundering procedures, the solicitor will need to prove the identity of the person gifting the deposit. Although what is acceptable ID varies depending on the solicitor, most will accept any of the following:
- Passport (preferred)
- Driving licence
Proof of address
Provide at least two of the following:
- Bank statement (preferred)
- Gas, electricity or water bill, or council tax statement
- Driving licence
- Letter from HMRC
3. Confirming where the gifted deposit came from
As part of anti-money laundering procedures, the solicitors have to prove that they know where the gifted deposit has come from. Often, the money will be from the sale of a home, pension drawdown or the sale of shares. In all of these cases, it will be simple to prove where the money has come from, as they will all these sources of capital will have been accompanied by documents that confirm all the details.
For money that has just been saved over time, rather than from the sale of an asset, bank statements could be produced from a year or more to illustrate how the savings have accumulated.
Two sad but important final points to note
Firstly, if the person making the gift dies within a certain time period, if the estate is over £325,000, the recipient of the gifted deposit may have to repay a percentage back. Known as a tapering relief on gifts, 40% of the amount given would have to be repaid if the person who made the gift dies within one to three years. The amount that would be required to be paid back is tapered (gradually reduced) from three to seven years after the death.
Secondly, the recipient will probably have to repay the money if the person making the gift becomes bankrupt.
Although gifted deposits may seem to involve a lot of work, they can make it possible for a family member to get onto the property ladder or help them to move up it. With properties being so expensive these days, a gifted deposit could make all the difference, so it can very worthwhile making the effort.