Gifted Deposits: The Rules, the Letter and the Tax for First-Time Buyers

A gifted deposit is money given to you towards a home, with no repayment and no share in the property. Each lender sets its own rules, often accepting family only, and asks the giver to sign a gifted deposit letter. Your solicitor checks where the money came from. Inheritance tax can apply if the giver dies within seven years.

If you are still working out whether you can borrow enough, start with how hard it is to get a mortgage as a first-time buyer. This guide picks up once someone has offered to help.

What counts as a gifted deposit

Money is a gift, for mortgage purposes, only if all three of these are true:

• It is never repaid, not even when you sell.
• No interest is charged.
• The giver gets no share in the property and no say over it.

If any of those is not true, it is a loan or an investment, not a gift. That is not necessarily a problem, but your lender has to know. See "Gift or loan" below.

Who can give you a deposit

There is no single rule. Each lender sets its own, and they differ.

Some lenders accept gifts only from close family: parents, grandparents, brothers and sisters, aunts and uncles, and in some cases step-relatives, in-laws, nieces, nephews or first cousins. Some will not accept a gift from a friend at all.

So before anyone transfers money, ask your broker or lender two questions: will you accept a gift from this person, and what paperwork do you need from them?

The gifted deposit letter

Your lender will usually ask the giver to sign a gifted deposit letter, or the lender's own form. What it must say varies, but lenders typically want:

• the giver's full name and address, and their relationship to you
• the amount of the gift
• confirmation that it is a gift and will never be repaid
• confirmation that the giver will have no interest in the property
• sometimes, confirmation that the giver will not live there
• a recent date: some lenders will only accept a letter signed within a set period

Your solicitor may ask the giver to sign a similar confirmation for the legal file. Use the lender's wording where it has one.

The checks your solicitor makes

Solicitors are covered by the Money Laundering Regulations. They must identify and verify their client and scrutinise each transaction, including, where necessary, where the money comes from. Their regulator, the SRA, rates conveyancing as the greatest money-laundering risk in the legal sector, so source-of-funds checks on a purchase are thorough.

For a gifted deposit, that means checking the giver's money as well as yours. The giver can expect to be asked for:

• photo ID and proof of address
• bank statements showing the money in their account
• evidence of where it came from, such as savings, the sale of a property or an inheritance

It is not a sign that anyone is suspected of anything. It is the law, and it applies to every purchase. The quickest way through is to tell your solicitor at the very start who is giving and how much, and for the giver to have their documents ready before the money moves.

If the giver will live with you: occupier consent

Lenders usually ask anyone aged 17 or over who will live in the home, but is not on the mortgage, to sign a consent form. By signing, they waive any rights over the property they might otherwise have, so the lender's mortgage comes first.

This matters when the giver plans to move in with you, such as a parent. Lenders take different views. Some will not accept a gift from someone who will live there. Others will, provided the giver signs a consent form and a deed of gift. Tell your broker early, and make sure the giver understands what they are signing.

Gift or loan: why it matters

Lenders count what you owe. When a lender works out what you can afford, it looks at your regular outgoings, including loan repayments. Money you have to pay back changes those sums, which is why the lender needs to know.

The letter has to be true. Signing a gift letter for money that is really a loan is a false statement to your lender, and can be a criminal offence.

If your family want the money back one day, or a share of the value when you sell, it is not a gift. Some lenders will consider other arrangements. Talk to your broker and to us before any money moves, not after.

Stamp duty: why the giver should not go on the deeds

It can be tempting to put a parent on the title deeds to "protect" their money. It can cost a lot of tax.

• First-time buyers' relief applies only if everyone buying is a first-time buyer. A parent who has owned a home is not.
• The higher rates for additional properties apply to the whole purchase if any one buyer would end up owning more than one home.

Example. You buy a £300,000 home on your own as a first-time buyer: no stamp duty. Add a parent who owns their own home to the deeds, and the higher rates apply to the whole price: £20,000.

Tax implications of a gifted deposit

The tax to think about is inheritance tax. If any is due on the gift, it is usually paid out of the giver's estate, unless they gave away more than £325,000 in gifts in the seven years before they died.

The seven-year rule

If the giver lives for seven years after the gift, there is no inheritance tax on it. If they die within seven years, the gift can count towards their estate. Where the gifts made in those seven years add up to more than the £325,000 tax-free threshold, gifts made within three years of death are taxed at the full 40%, and older gifts at a reduced rate:

• 3 to 4 years: 32%
• 4 to 5 years: 24%
• 5 to 6 years: 16%
• 6 to 7 years: 8%
• 7 years or more: nothing

Gifts that are exempt straight away

Some gifts never count, however soon the giver dies:

• The annual exemption. Each person can give away £3,000 a tax year. Any part unused last year can be carried forward for one year only. Two parents who did not use last year's allowance could give £12,000 between them, exempt.
• Wedding gifts. A parent can give up to £5,000 to a child who is getting married.
• Regular gifts from income, if the giver can afford them after their usual living costs and pays them from regular income.

If the giver sells something to raise the money

Cash in a bank account is simple. But if the giver sells shares outside an ISA, or a property that is not their main home, to fund the gift, that sale can carry capital gains tax for them.

The gifted deposit letter also gives the giver's family a dated record of the gift, which helps if questions arise later about their estate.

Before any money moves: a checklist

1. Check your lender accepts a gift from this person, and get its list of documents.
2. Agree in writing that it is a gift, using the lender's wording.
3. Tell your solicitor at the start who is giving and how much.
4. The giver gathers ID and bank statements showing where the money came from.
5. Keep the giver off the deeds unless you have taken advice on the stamp duty.
6. If the giver will live with you, tell your broker before you apply.

Questions people ask

What are the rules for a gifted deposit?

The gift must never be repaid, carry no interest and give the giver no share in the home. Beyond that, each lender sets its own rules: who may give, what the gifted deposit letter must say and whether the giver may live there. Your solicitor must also check where the money came from.

What are the tax implications of a gifted deposit?

The tax to think about is inheritance tax. If the giver lives seven years after the gift, there is none on it. If they die sooner, it can count towards their estate, and any tax is usually paid by the estate. Some gifts are exempt straight away, such as up to £3,000 a year from each giver.

How much can parents give towards a deposit without inheritance tax?

Any amount, if they live seven years afterwards. Some gifts are exempt immediately: each parent's £3,000 annual exemption, plus last year's if unused, which is up to £12,000 from two parents. A parent can also give up to £5,000 to a child who is getting married. Larger gifts depend on the seven-year rule.

Can a friend give me a gifted deposit?

It depends on your lender. Some accept gifts only from close family, such as parents, grandparents, brothers and sisters, aunts and uncles, and some will not accept a gift from a friend at all. Ask your broker or lender before the money is transferred, and get its list of the documents it needs.

What should a gifted deposit letter say?

Typically: the giver's name, address and relationship to you; the amount; that it is a gift and will never be repaid; and that the giver will have no interest in the property. Some lenders also want confirmation that the giver will not live there, and a recently dated letter. Use your lender's own form where it has one.

Will my solicitor check the person giving me the deposit?

Yes. Anti-money-laundering law requires your solicitor to check where the money for your purchase comes from, and that includes a gift. The giver can expect to be asked for photo ID, proof of address and bank statements showing the money and where it came from. Having them ready early avoids delays.

Can the person giving the deposit live in the property?

It depends on the lender. Anyone aged 17 or over who will live there without being on the mortgage is usually asked to sign a consent form waiving their rights. Some lenders will not accept a gift from someone who will live there; others will, with a consent form and a deed of gift. Tell your broker early.

Can my parents get their money back when I sell?

Not if it is a gift. Money that has to be repaid, or that gives your parents a share of the sale price, is a loan or an investment, and your lender must be told. Some lenders will consider other arrangements. Signing a gift letter for money that is really a loan is a false statement to your lender.

Our residential conveyancing team acts for first-time buyers, including purchases funded with a gifted deposit.

Sources

Customer due diligence and source of funds: legislation.gov.uk/uksi/2017/692/regulation/28

Money-laundering risk in conveyancing (SRA): sra.org.uk/sra/research-publications/aml-risk-assessment/

Inheritance tax on gifts, exemptions and taper relief: gov.uk/inheritance-tax/gifts

First-time buyers' relief: gov.uk/guidance/stamp-duty-land-tax-relief-for-land-or-property-transactions

Higher rates for additional properties: gov.uk/guidance/stamp-duty-land-tax-buying-an-additional-residential-property

Stamp duty bands: gov.uk/stamp-duty-land-tax/residential-property-rates

Capital gains tax: gov.uk/capital-gains-tax/what-you-pay-it-on

Affordability checks (FCA): fca.org.uk/consumers/affording-mortgage

False representation: legislation.gov.uk/ukpga/2006/35/section/2

This is general information about gifted deposits for purchases in England and Wales, not mortgage, tax or legal advice on your situation. Lenders' rules change; check yours before any money moves.