Bridging The Gap: Gifting Funds For Property Deposits In The UK

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For many prospective first-time buyers, raising a deposit is the biggest hurdle to getting on the property ladder. With house prices high relative to incomes, the bank of Mum and Dad is increasingly stepping in. Gifting some or all of the deposit funds allows children to achieve their homeownership goals sooner. However, there are right and wrong ways to provide this kind of support.

The Deposit Dilemma Facing First-Time Buyers

Saving up enough cash for the deposit while paying rent is challenging for today’s first-time buyers. Typical deposit amounts now represent

  • 10-15% of the purchase price – The minimum to secure a mortgage with competitive rates. Can equate to £30,000 – £50,000.
  • Over 5 times the average salary – It takes the average young earner nearly 5 years to save a 10% deposit based on their income alone.

With such large sums required, family help makes homeownership possible much faster. But gifting must be done correctly to avoid legal issues.

Why Family Help with Deposits is Increasing

There are several reasons why the “Bank of Mum and Dad” is taking a larger role in funding deposits

  • Limited government help – Schemes like Help to Buy are not accessible or adequate for many buyers.
  • Wanting to help kids – Older generations with property wealth are keen to aid struggling offspring.
  • Earlier inheritance – Rather than waiting to leave money in a will, parents gift it sooner.
  • Tax incentives – Gifted sums may be exempt from inheritance tax if the giver lives 7 more years.
  • Guarantor alternative – Some parents prefer to gift funds rather than act as guarantors on a mortgage.
  • Buy better homes – Gifts allow children to afford better properties in more desirable areas.

With generous gifting within the rules, buyers can overcome the deposit barrier and achieve their homeowning aspirations more quickly.

How Much Can Be Legally Gifted for a Deposit?

There are a few key ground rules parents should follow when gifting cash for a property deposit:

  • Document gift letter – Have both parties sign a letter stating the sums are a gift, not a loan.
  • Use allowances – Annual gifts up to £3,000 are exempt from inheritance tax. Small gifts under £250 are also allowed.
  • Gift from savings – Large lump sums must demonstrably be from your regular income or existing savings.
  • Retain emergency funds – Do not gift so much that it impacts your financial security.
  • 7-year rule – To remove the value from your estate, you must survive 7 years beyond the gift date.

Provided these protocols are followed, there is no strict legal limit to how much can be gifted. But mortgage lenders do impose deposit rules.

Lender Requirements on Gifted Deposits

While there are no legal limits on gifted deposit amounts, lenders can be more restrictive. Key requirements:

  • Proof of gift – The lender will want to see evidence the funds are genuinely gifted, not a loan.
  • Identification – You will need to provide ID details to confirm your relationship with the buyer.
  • Source of funds – Demonstrate the sums gifted came from regular savings or income, not borrowing.
  • Limits on percentage gifted – Many lenders cap the deposit portion coming from gifts at 50% so buyers are contributing savings too.
  • Minimum buyer contributions – Lenders often mandate that buyers put in at least 5% of the purchase price from their resources.

By understanding lender rules, parents can gift deposit funds in ways that will comply with the requirements buyers must meet to secure a mortgage.

How Much Parents Can Afford to Gift Children?

When considering gifting for a deposit, key factors determine: How Much Money Can You Gift Your Children for a Deposit.

  • Your current savings – Avoid touching emergency funds, focus on using “extra” savings you have accumulated over the years.
  • Your income – Surplus income you won’t need for retirement living costs can potentially be gifted.
  • Value of your home – If you have significant equity in your property, consider gifting a portion.
  • Other heirs – Will gifting impact inheritances for your other children? Consider being equitable.
  • Inheritance tax – Gifts above your annual allowances could incur inheritance tax if you pass away within 7 years.
  • Your retirement provision – Don’t compromise your financial security in later life.
  • Affordability for your child – Consider their income and ability to repay a mortgage on the property.

The amount you can comfortably afford depends entirely on your financial situation. Seek professional advice to determine an appropriate sum.

Creative Ways Parents Could Fund Deposits

Beyond cash gifts, parents could also consider these inventive strategies to help children raise a deposit:

Shared Equity

You put up a portion of the property value, entitling you to a corresponding share of the home. When the buyer sells in the future, you receive your equity back.

Loans on Favorable Terms

Rather than an outright gift, you could lend some of the deposit amount to your child at minimal interest, to be repaid slowly over time.

Raising Equity Release

If you own your home outright, lifetime mortgage products allow you to access its value as a lump sum, which you can then gift.

Leave Money in Your Will

Ultimately leaving the gifted deposit amount in your will to other beneficiaries keeps it equitable between heirs.

Co-Purchase Property

You could jointly buy the property with your child, with your share a future “pre-inheritance”. When you pass, your share transfers to them via the will.

With professional financial and legal guidance, parents have options to structure deposit support in tax-efficient, mutually beneficial ways.

How Parents Should Gift Money for Deposits

To gift deposit funds both legally and safely, parents should follow this process:

  • Consult an independent adviser to determine an appropriate amount you can afford to gift without jeopardising your finances.
  • Research inheritance tax rules to understand any implications of large gifts.
  • Involve a solicitor to draw up a formal gift letter declaring the funds are irreversibly gifted, not lent.
  • Transfer the funds well in advance so your child has time to season the money in their account before the mortgage application.
  • Keep records showing where the money came from and the relationship between the giver and recipient.
  • Have your child deposit the funds into their own savings account so it can be traced.
  • Ensure your child contributes personal savings too, as most lenders mandate the buyer puts in at least 5% themselves.

Taking prudent steps protects all parties and creates a paper trail for lenders providing the mortgage.

Risks of Gifting Deposit Money

While deposit gifts often enable earlier homeownership, there are some risks parents should weigh:

  • Reduces your savings – Large lump sums gifted reduce your safety net in retirement.
  • Affects plans for other heirs – Siblings may resent large sums gifted to certain children.
  • Inheritance tax – Gifts above the annual exemptions become liable if you die within 7 years.
  • Misuse of funds – Once gifted, parents have no control over how the money is ultimately used.
  • Kids still can’t buy – Even with support, children may struggle to secure a mortgage to complete a purchase.
  • Limits your options – You lose the flexibility to sell assets like your home if the value is tied up in gifts.
  • Encourages overborrowing – Children with family help may take on larger mortgages than they can comfortably afford.

While providing deposit help has benefits, consider risks too. Maintain open communication with your child so gifted funds are used as intended.

Rules Children Should Follow When Gifted Deposits

To make the deposit gifting process smooth, children should adhere to these guidelines:

  • Be involved in decisions about amounts – Discuss with parents what sums are comfortable based on their situation.
  • Get professional advice on structuring the gift appropriately and documenting it.
  • Do not pressure parents – it is their decision, based on what they can afford.
  • Save diligently alongside – Contribute your savings to meet lender deposit requirements.
  • Keep money gifted untouched in your accounts for several months so it appears seasoned.
  • Be wise and realistic about budgets – Consider carefully what is affordable monthly for mortgage repayments.
  • Be disciplined and patient – It can take months for lenders to approve gifted deposits.
  • Show gratitude – Recognise your parents’ generosity and do not take it for granted.

Following the rules makes the process smoother for you and protects your parents’ interests too.

Alternatives to Family Deposit Gifts

If parents are unable or unwilling to gift funds, first-time buyers have some other options to build their deposit:

  • Lifetime ISA – The government adds a 25% bonus up to £1,000 annually.
  • Shared ownership – You only need a 5-10% deposit to buy a portion of the home.
  • Help to Buy – The equity loan scheme means you only need 5% down.
  • Save rigorously – Cut all non-essentials and throw all extra income into saving for the deposit month after month.
  • Delay buying – Consider renting longer to build savings until you have the requisite deposit amount.
  • Buy cheaper property – Be modest in your expectations and constraints so you can afford to save the deposit yourself.

While family help has benefits, children unwilling to change expectations may need to pursue these alternatives on the path to homeownership.

Key Takeaways on Gifting for Deposits

The Bank of Mum and Dad is playing an increasing role in helping kids buy properties. If considering deposit gifts, key points to remember are:

  • There is no legal limit, provided tax allowances are followed and evidence is provided.
  • But lenders restrict the percentage of the deposit coming from gifts, typically 50%.
  • Children need to contribute a minimum amount (usually 5%) from their savings.
  • Gifts should come from parents’ surplus income or existing savings, not jeopardise retirement.
  • Formally document gifts via a solicitor’s letter and keep careful records.
  • Parents should discuss the implications of gifts with other heirs and their advisers.
  • Children must be disciplined, patient and grateful during the process.

With prudence and open communication on all sides, deposit gifts can bridge the financial gap for children striving to buy their first home.

In Summary

Achieving homeownership is becoming increasingly difficult for young buyers without family support. Parents who are able and willing to gift some deposit funds can be a crucial lifeline. However, there are legal and financial implications that need careful thought on both sides. With professional advice and adherence to protocols around deposit gifts, parents can provide an invaluable leg-up responsibly. This support can make a difference in their children achieving homeowner aspirations.

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