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13 Dec 2020

Bank of Mum and Dad: how to gift money to your child for a house deposit

Over-55s gift £230m to help family members buy a home in 2020

Older homeowners have gifted more than £230m to help relatives buy a home in 2020.

A new report by Key Retirement Solutions shows more than £500m has been gifted by over-55s this year, with parents and grandparents increasingly looking to help relatives on to the property ladder.

Here, Which? explains the rules and tax implications of gifting money to boost a family member's mortgage deposit.

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Gifted deposits on the rise due to stamp duty holiday

The 'Bank of Mum and Dad' isn't a new phenomenon, but new research shows gifting has been on the rise in recent months.

Key says older homeowners increasingly looked to help family members with their mortgage deposits during the third quarter of this year.

Of the £230m gifted for house deposits in 2020, £100m came between July and September, with gifts spiking after the government announced a temporary cut to stamp duty until April 2021.

The rise comes during a year when first-time buyers have required increasingly large deposits after nine-in-10 90% and 95% mortgages were withdrawn following the coronavirus outbreak.

Do mortgage lenders allow gifted deposits?

Generally speaking, mortgage lenders are happy to accept gifted deposits from family members.

Earlier this year, Nationwide made headlines for only allowing gifts to make up 25% of the applicant's deposit, but it has now relaxed these rules.

Lenders will usually require you to confirm the following when gifting a deposit:

  • The sum gifted;
  • The source of the funds (within the UK, within the EU, or outside of the EU);
  • Your relationship to the applicant;
  • A signed declaration that you won't have any financial interest in the property;
  • A signed declaration that if the money is loaned it will only need to be repaid when the property is sold;
  • Photo identification and proof of address.

The biggest banks and building societies have specific forms you'll need to fill out and sign to make the declaration, but smaller lenders may request a signed and certified letter.

Your child may also need to provide a bank statement proving that the gift came from you as part of the bank's money laundering checks.

Can the deposit be loaned rather than gifted?

Gifted deposits and loaned deposits are very different things in the eyes of mortgage lenders.

Banks may be happy to accept loaned deposits, subject to a signed declaration that the loan will only need to be repaid when the property is sold.

If this isn't the case, the lender will consider the loan to be a financial commitment (like a credit card or loan from a bank).

This means it'll need to factor in the planned repayments when calculating your child's affordability.

Can anyone gift a deposit?

Lenders sometimes place blocks on who the money can be gifted by.

Parents, grandparents and siblings will usually be permitted, but banks may be reluctant to accept deposits from more distant relatives or friends.

The rules vary from lender to lender, so it's best to take advice from a mortgage broker if you have a less clear-cut situation.

Tax implications of gifting a deposit

If you die within seven years of gifting cash to a relative, they may need to pay inheritance tax (IHT) on the money.

You can gift up to £3,000 per financial year without qualifying for IHT, and you can carry any unused portion forward by one next financial year.

This means an individual can make gifts totalling £6,000 (or £12,000 for a couple) if they didn't make any substantial gifts the year before.

IHT rules can be very complicated and any bill will depend on the overall value of the estate upon death.

You can find out more in our guide on inheritance tax on gifts, but it's worth taking independent advice if you're unsure about your exposure to IHT.

Is now a good time to gift a house deposit?

It's a difficult time to buy a home, and for first-time buyers, there are greater barriers than before.

The longstanding issue of saving a big enough deposit has been exacerbated by lenders withdrawing their 90% and 95% mortgages during COVID-19.

This means that borrowers who might have got a mortgage with a 5% deposit a year ago now face needing 10% or even 15% to get on the ladder.

In one sense, this means that it's a great time to gift a deposit, as first-time buyers are very much in their hour of need.

On the other hand, there might be wisdom in waiting. Current house price increases are being driven by the stamp duty holiday, meaning some people may be overpaying in their rush to buy a home.

And while the tax cut has provoked excitement, it will also only have a negligible impact for most first-time buyers, who were already exempt up to £300,000 in England and Northern Ireland, £180,000 in Wales and £175,000 in Scotland.

With this in mind, it may be better to wait for the market to settle and for more low-deposit mortgages to return before rushing in.

Ways of gifting a house deposit

There are many ways you can help your child buy their first home, and while gifted deposits are common, it's important not to stretch your own finances.

Some homeowners use equity release to unlock cash from their home, but this can be an expensive commitment and should only be done after careful consideration and independent financial advice. Similar can be said about accessing money from your pension.

If you don't have significant savings, there are other ways you can help, including options such as guarantor mortgages (where you use your home or savings as collateral for your child's mortgage).