A gifted deposit is money handed to someone, usually first-time buyers, to help them purchase a property. The majority of first-time home buyers now rely on the generosity of family to gift them monies to help with their deposit. However, it’s not as simple as parents transferring money into their children’s account and calling it a gift. There are legal and tax implications to consider when giving or receiving a gifted deposit.
If you are to rely on a gift, you must inform your mortgage broker (or lender) as well as your conveyancer about the gifted deposit. This is important because when you accept the gifted deposit, there is a risk that the lender may reduce their mortgage advance. If you can’t find the difference, then you may not be able to buy that property. It’s also worth noting that there are some mortgage lenders who have a policy of not lending any money should the person making the gift not be related to the buyer. Hence, it is best to deal with gifts early on in the transaction.
Your conveyancing solicitor must follow the procedure below when a gifted deposit is involved:
- Inform the lender of the gift. However certain lenders are very relaxed about gifted deposits if the money is from a blood relative such as parents or siblings.
- Prepare a Gifted Deposit Declaration (also known as a Deed of Gift). This is a letter that must be signed by each person gifting monies. This letter has a specific format, and it will detail the parties’ names and addresses, their relationship to the buyers and the amount being gifted. It will also go on to declare that the persons giving the gifted deposit will not require monies to be returned, that they are solvent, have no interest in the property and that they will not seek to exercise any rights over the property.
If the giftors have any questions on the Gifted Deposit Declaration, they may need to seek independent legal advice as the purchaser’s conveyancer may not be able to advise them on the terms of the Declaration.
If there is no lender involved, a Gifted Deposit Declaration is not mandatory.
- Prepare a Declaration of Solvency for the giftor to confirm that they are not insolvent at the time of the gift.
- Carry out bankruptcy checks against each giftor.
- Proof of identity and proof of address (not older than three months) must be provided for each person giving the gifted deposit (giftor). Your conveyancing solicitor is likely to run an electronic identity verification using these documents so they must be valid. The electronic verification will also check the giftors against international sanctions lists.
- Source of Wealth checks will need to be carried out on each giftor to comply with the Anti- Money Laundering Regulations. Source of wealth checks are quite an intrusive exercise that your conveyancer is required to carry out. Your conveyancer will query monies received by the giftors over many months and sometimes years. The conveyancer must make sure the monies being gifted is consistent with the economic and social profile of the giftors. To do this, your conveyancer will need to understand the background of the giftor, how and over what period they accrued the gifted deposit funds, and be satisfied that the funds are from legitimate sources.
If the giftors do not provide the documentary evidence requested by the conveyancer, the conveyancer will not be able to accept the gifted deposit and they may even be compelled to withdraw from the transaction. Most parents and family members may not have been involved in a conveyancing transaction in the near past and hence may not be familiar with the requirements of the Anti-Money Laundering regulations and how it applies to conveyancing. Therefore, you should explain to the giftors, before accepting the gift, of what will be required from them for the gifted deposit to be utilised for the purchase. If you have concerns about how to deal with this, please contact our friendly team of conveyancers who will be able to assist you.
Gifted deposit from overseas
Where the gifted deposit is coming from abroad, further enhanced due diligence will need to be carried out by your conveyancer. You should give all the details of the gift and giftor to your conveyancer at the outset as the source of wealth and identity checks on overseas giftors can be very time consuming and best dealt with early on. There are also certain countries from which your conveyancer will not be able to accept gifted deposits. In particular, gifted deposits from China are now very difficult to accept due to Chinese Capital Controls in place. The UK does not have Capital Controls and hence breach of a Chinese Capital Control rule is not a criminal offence in the UK. However, a breach of the Capital Control rules in China may be considered fraudulent and, coupled with the spate of arrests of Chinese gangs laundering money in the UK, has led to regulators taking a tough stance on the matter. For your conveyancer to accept a gifted deposit from China, you will need to provide written approval from the Chinese State Administration of Foreign Exchange (SAFE). However, as China does not allow money to be taken out of China to fund property purchases abroad, it is unlikely that the said approval will be given.
There are also countries from which your conveyancer cannot accept monies due to those countries being classified as high risk third jurisdictions that have failed to meet the requirements of the Financial Action Task Force. Monies being received from within the EU is generally regarded as safe as the rules and regulations are applied and policed to a high standard. If you are expecting a gift from overseas, please contact us should you wish to discuss this with one of our conveyancers.
What is a ‘seller’s gifted deposit’ also known as a concessionary purchase?
A seller’s gifted deposit will see the seller giving part of the purchase price as a deposit or discount to a buyer. The gift is made by the seller, for example, by reducing (going below market value) the price on completion or exchange of contracts. They are essentially reducing the price of the property – and will see a lender reducing their offer because they may fear the price has been inflated.
However, if the sale is within the same family, it’s crucial that you tell your mortgage adviser and conveyancing solicitor the details so that they understand the situation. This is also known as a concessionary purchase or a transaction at an under value. It is usually an arrangement between parents and children whereby parents can help their children get onto the property ladder. The benefits of these arrangements are:
- parents can reduce the amount of deposit the children need to pay for the property;
- the gift can be for any amount the parents choose and so children may be able to acquire the property without putting any money in themselves;
- pass the property onto the children so it stays within the family;
- this is such a common practise with first time buyers that there are now numerous lenders that will offer concessionary purchase mortgage products; and
- this method of transferring property can, if classified as a lifetime gift, save on significant amount of inheritance tax.
Concessionary purchases have several potential issues that must be addressed early on. Therefore, you should speak to your mortgage advisor and conveyancer about the transaction structure. You must make sure that the lender is aware the transaction is a concessionary purchase and give the lender details of the gifted amount by the seller. The conveyancing solicitor will need to carry out additional work to make sure the concessionary purchase gift is a genuine gift, and that the seller is in no way retaining any interest in the property after the sale. Additionally, the conveyancing solicitor needs to carry out bankruptcy checks on the persons gifting (giftors) the deposit, prepare a statutory declaration of solvency for each giftor and possibly including support from indemnity insurance to protect the lender against any potential bankruptcy of the giftor.
Concessionary purchases are complicated, and you should speak to an experienced concessionary purchase conveyancing solicitor to help you with your case. Click here to get a concessionary purchase quote.
What is a family gifted deposit?
Here, the gifted deposit is being made by a member of the buyer’s family.
This may see one or both of the buyers’ parents giving them either part or all of the home’s deposit or they may give the buyer some or all the cash needed for topping up the mortgage loan for buying the property. Again, you will need to tell the conveyancer, who will need to make sure you and the lender are protected.
Receiving a gifted deposit
There are a few things to think about if you’re considering accepting a gifted deposit from someone. The first is that the money must be given voluntarily – it can’t be a loan or payment for services rendered. If the giftor expects the money to be returned, or interest to be paid, or any interest taken in the property being purchased, the monies will be classified as a loan and not a gift. Lenders are very unlikely to accept a private loan to fund a deposit. Secondly, the gift must be from an individual, not a company or organisation.
There are various ways to give a gifted deposit, but the most common is for the giver to transfer the money into the buyer’s bank account. However, the giver and receiver must be over 18 years of age. Plus, the giver must be gifting the money out of their own free will – they can’t be coerced or forced into giving the money. The money must be given without expecting anything in return.
Gifted deposits must be transferred to the purchaser’s personal account and then purchaser transfers the money to the conveyancing solicitor.
How much can someone gift for a house?
A gifted deposit doesn’t have to be a huge sum of money as it can be any amount, but it must be a contribution towards the overall cost of purchasing the property. If you’re considering receiving a gifted deposit, it’s important to speak to an experienced conveyancer and your mortgage advisor (or lender) to make sure everything is acceptable to the conveyancer and the lender.
When is a gift of money not a gifted deposit?
You may receive money as a gift for many reasons. It could be a wedding gift, birthday gift, gift for a new-born or just a gift from family to help you with life. It could also be a gift left to you by the Will of a deceased relative. These are not classified as a gifted deposit unless the monies were given specifically to purchase a property. However, when it is not 100% clear that the gift was not for the purchase of a property, a conveyancing solicitor will need to take a belt and braces approach to protect you and the lender by treating it as a gifted deposit.
Inheritance tax and gifted deposits
A gift can be free of inheritance tax if the giftor survives for seven years after the gift. However, where the giftor passes away within the seven years, then some or all the gifted deposit may be liable to inheritance tax and consequently the purchaser will need to pay the inheritance tax. If you are concerned about this, speak to one of our conveyancers as you could obtain life insurance on the life of the giftor to cover the potential inheritance tax liability.
Stamp Duty Land Tax on gifted deposits
Stamp duty is payable on the actual consideration (generally money) paid for a property. Therefore, where there is a concessionary purchase (seller’s gifted deposit), the stamp duty is payable on the reduced price; that is the original price less the gifted amount. Where there is a gifted deposit from family to assist the purchaser, the stamp duty is payable on the amount paid to purchase the property, and hence the gift element will not reduce the tax payable.
Why must the giftor sign a Declaration of Solvency?
It may be an offence for anyone to transfer any assets (including cash/money) with a view of putting it beyond the reach of creditors. If a giftor becomes insolvent within 3 to 5 years of making a gift, a trustee in bankruptcy (appointed to act on behalf of creditors) may investigate any such transfers. Trustees in bankruptcy have wide powers to claw back such assets. This includes confiscating properties and disposing of them. This can result in a loss to the lender and the buyer. Hence, this is why conveyancers are likely to insist on a declaration of solvency (in addition to a deed of gift), and sometimes, coupled with indemnity insurance to cover the risk of any claw backs by the trustee in bankruptcy.
