What Is a Gifted Deposit?
A gifted deposit is a financial contribution provided by a family member, close relative, or even a friend to help you purchase a home. Unlike a loan, a gifted deposit does not require repayment, making it a valuable resource for first-time buyers or those struggling to save for a deposit. With rising property prices in the UK, many buyers find it challenging to meet the minimum deposit requirements set by lenders. Gifted deposits have become an increasingly popular solution, especially among younger buyers who may receive financial support from parents or grandparents.
The process is straightforward: the giver provides a sum of money to the buyer, which is then used as part of the deposit for the property purchase. However, lenders require assurance that the money is a gift and not a loan, as this could affect the buyer’s ability to repay the mortgage. This is why proper documentation, such as a gifted deposit declaration, is essential. Gifted deposits can significantly reduce the financial burden on buyers, enabling them to secure a mortgage and step onto the property ladder sooner.
Who Can Gift a Deposit?
Not everyone is eligible to provide a gifted deposit. In most cases, lenders prefer the gift to come from a close family member, such as a parent, grandparent, or sibling. This is because lenders view financial gifts from immediate family members as more stable and less likely to create complications during the mortgage process.
Parents are the most common source of gifted deposits, often referred to as the "Bank of Mum and Dad." Grandparents also frequently contribute, especially in multi-generational families where pooling resources is common. In some cases, other relatives, such as aunts, uncles, or even close friends, may provide a gifted deposit, but this is less common and may require additional scrutiny from the lender.
It’s important to note that the giver must have no financial interest in the property being purchased. For example, a partner or spouse who will co-own the property cannot "gift" a deposit, as this would not be considered a true gift. Always check with your lender to confirm their specific requirements regarding who can provide a gifted deposit.
The Importance of a Gifted Deposit Declaration
Lenders require a gifted deposit declaration to ensure that the money provided is a genuine gift and not a loan. This document is a formal statement from the giver, confirming that they do not expect repayment and have no claim on the property. Without this declaration, lenders may assume the money is a loan, which could affect the buyer’s mortgage application.
The declaration typically includes the giver’s name, relationship to the buyer, the amount gifted, and a statement confirming that the money is a gift. It may also include a clause stating that the giver has no financial interest in the property. This document must be signed and dated by the giver and may need to be witnessed by a solicitor.
What Happens If You Don’t Provide a Declaration?
Failing to provide a gifted deposit declaration can lead to significant delays in the mortgage approval process. Lenders may refuse to proceed with the application until they receive the necessary documentation, which could jeopardize the property purchase. In some cases, the lender may reject the application altogether if they suspect the deposit is a loan.
To avoid these issues, ensure that the declaration is completed accurately and submitted promptly. If you’re unsure about the requirements, consult your solicitor or mortgage broker for guidance.
How to Write a Gifted Deposit Letter
A gifted deposit letter is a crucial part of the process, serving as formal proof that the deposit is a gift. Writing this letter is relatively simple, but it’s essential to include all the required details to satisfy the lender’s requirements.
Start by addressing the letter to the lender or solicitor handling the transaction. Include the giver’s full name, address, and relationship to the buyer. Clearly state the amount being gifted and confirm that it is a gift with no expectation of repayment. The letter should also include a statement that the giver has no financial interest in the property.
Finally, the letter must be signed and dated by the giver. In some cases, the lender may require the letter to be witnessed by a solicitor. Always check with your lender or solicitor to ensure the letter meets their specific requirements.
Common Mistakes to Avoid in a Gifted Deposit Letter
When drafting a gifted deposit letter, avoid common errors that could delay the process. One frequent mistake is failing to include all the required details, such as the giver’s relationship to the buyer or the amount being gifted. Another common error is using vague language that could be misinterpreted by the lender.
Ensure the letter is clear, concise, and free of any ambiguity. Avoid making any statements that could imply the money is a loan or that the giver has a financial interest in the property. If you’re unsure about the wording, consult your solicitor or mortgage broker for assistance.
How Lenders Assess Gifted Deposits
Lenders evaluate gifted deposits carefully to ensure they meet their criteria. The primary concern is that the deposit is a genuine gift and not a loan, as this could affect the buyer’s ability to repay the mortgage. Lenders also assess the source of the funds to ensure they comply with anti-money laundering regulations.
The lender will typically require a gifted deposit declaration and may also request additional documentation, such as bank statements from the giver. They may also verify the relationship between the giver and the buyer to ensure it aligns with their policies.
Differences Between Major and Smaller Lenders
Major lenders often have stricter requirements for gifted deposits, including more extensive documentation and verification processes. Smaller lenders, on the other hand, may be more flexible and willing to consider gifts from a wider range of sources. However, this can vary significantly between lenders, so it’s essential to research your options and consult a mortgage broker for advice.
Tax Implications of Gifted Deposits
Gifted deposits can have tax implications for both the giver and the receiver. In the UK, gifts are generally exempt from inheritance tax if the giver lives for at least seven years after making the gift. However, if the giver passes away within this period, the gift may be subject to inheritance tax, depending on the value of their estate.
It’s also important to consider potential capital gains tax implications if the gift involves transferring ownership of an asset, such as a property. To avoid unexpected tax liabilities, consult a financial advisor or tax specialist before proceeding with a gifted deposit.
Tips for Discussing Gifted Deposits with Family
Discussing money with family can be a sensitive topic, but open and honest communication is essential when arranging a gifted deposit. Start by explaining your financial situation and why you need assistance. Be clear about how the gifted deposit will be used and reassure the giver that their contribution will be properly documented.
It’s also important to address any concerns the giver may have, such as potential tax implications or the impact on their own finances. If necessary, involve a solicitor or financial advisor to provide clarity and ensure everyone is on the same page.
When to Consult a Mortgage Broker
A mortgage broker can provide invaluable guidance when dealing with gifted deposits. They can help you navigate the lender’s requirements, ensure all documentation is in order, and identify the best mortgage options for your situation.
Questions to Ask Your Mortgage Broker
When consulting a mortgage broker, ask questions such as:
- Which lenders accept gifted deposits?
- What documentation is required?
- Are there any restrictions on who can provide a gifted deposit?
- How will the gifted deposit affect my mortgage application?
- Can you recommend a solicitor to assist with the process?
By asking these questions, you can ensure you’re fully informed and prepared to proceed with your property purchase.
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