Can I Use Gifted Money To Buy A Property In The UK

Updated: 02/12/2024

Have you ever thought: Can I use gifted money to buy a property in the UK? It’s a question many prospective homeowners ponder, especially first-time buyers looking for ways to afford their dream home. Using gifted money—often from family or friends—can ease the burden of rising property costs, but there are important elements to consider.

What is a Gifted Deposit?

A gifted deposit refers to a sum of money given to a buyer to assist in purchasing property. This type of financial support is popular among first-time buyers, as it can significantly increase their chances of securing a mortgage. Essentially, this deposit serves as part of the larger payment you’ll need when buying a home, typically provided before the purchase is finalised.

This arrangement is not merely a casual act of generosity; it often requires proper documentation to ensure compliance with legal and financial guidelines.

What is a Gifted Deposit explained by our very own ‘Mortgage Mike’  below…Simply click on play!

Can You Use a Gifted Deposit as a First-Time Buyer?

Absolutely! If you’re a first-time buyer, using a gifted deposit can greatly help make your property purchase more attainable. Many mortgage lenders are open to the idea of gifted deposits, provided that specific conditions are met. This financial assistance not only allows you to have a larger deposit but also might improve your chances of securing a better mortgage deal.

However, you’ll need to inform your mortgage lender about the gifted money when applying. They want to ensure that you can responsibly manage your future mortgage payments and won’t be burdened by additional financial strain.

Different Types of Gifted Deposit

Understanding the different types of gifted deposits can clarify what might best suit your circumstances. Here are the main types:

1. Family Gifts: This is the most common form of gifted deposit. Parents or relatives often offer money to help you either with the deposit or even covering some of the purchase price.
2. Friendships Gifts: Sometimes friends may wish to help you get on the property ladder, providing you with funds to use in your purchase.
3. Government Schemes: Certain government initiatives in the UK may allow for gifted deposits from broader sources, potentially with accompanying incentives.
4. Life Insurance Policies: Some individuals may choose to gift the cash value of a life insurance policy to help with a property deposit.

When considering a gifted deposit, remember that the source and the nature of the gift can affect your mortgage application.

How to Prove the Source of a Gifted Deposit

When you decide to use a gifted deposit for your property purchase, properly documenting the source of that gift is crucial. Mortgage lenders will likely ask for proof to ensure it’s a genuine gift and not a loan that must be repaid.

To verify the source of the funds, you’ll typically need to provide:

• A Gift Letter: This document should detail the amount given, the relationship between you and the giver, and confirm that the deposit does not need to be repaid. It should also include both parties’ names and signatures.
• Bank Statements: The giver might need to provide bank statements to show the funds were available and transferred properly.
• Proof of Funds: If the money comes from specific accounts, additional documents might be necessary to illustrate where the money is coming from.

Gathering this information in advance can help streamline the mortgage application process and reduce any potential complications.

Legal Implications of Gifting a Deposit

While the concept of gifting money might seem straightforward, it comes with certain legal considerations. Once the money is given to you, the giver loses all rights to the funds, meaning they cannot later ask for repayment.

However, it’s essential to consider:

• Written Agreements: Both parties may benefit from a legal document stating the terms of the gift. It could protect you from future disputes.
• Witnesses: Having a witness sign the gift letter can add credibility and ensure a clear understanding of the arrangement.

Moreover, if the giver were to become ill or pass away, a written record can clarify their intent and prevent misunderstandings.

Tax Implications of a Gifted Deposit

In the UK, while receiving a gift doesn’t incur immediate income tax, there are still tax implications to consider. A large gift could potentially trigger inheritance tax if the giver were to die within seven years of making the gift.

Here are some key points related to tax:

1. Annual Exemption: Each individual can gift up to £3,000 per tax year without incurring inheritance tax, known as the annual exemption. If you haven’t used your exemption from the previous year, you can combine it to give up to £6,000.
2. Gifts to Spouses and Civil Partners: Unlimited gifts can be made between spouses or civil partners without tax implications.
3. Potential Tax Liabilities: If the giver dies within seven years of the gift, the amount may be considered part of their estate, which could incur inheritance tax if the total value exceeds the thresholds.

Being informed about these tax rules will ensure you and the giver can make adequate arrangements, avoiding any unexpected financial burdens later on.

Should the Gift Giver Die, Would There Be a Liability for Inheritance Tax?

This is an important consideration when it comes to gifted money. We mentioned it briefly above, but if your gift giver were to pass away within seven years after making the gift, the amount could be considered as part of their estate for inheritance tax purposes.

Here’s how it works:

• Petitioning for Returns: If the total value of the deceased’s estate, including gifts made within the last seven years, exceeds the inheritance tax threshold, the estate may be liable to pay tax.
• Taper Relief: If the giver has died within the seven years, taper relief may come into play, which gradually reduces the tax owed based on how many years have passed since the gift was made.
• Communication is Key: It’s beneficial to have open discussions with your family about potential gifts and the implications thereof.

These factors—while concerning—are important in understanding the broader context and potential impacts of receiving money as a gift.

Steps to Take When Considering a Gifted Deposit

If you’re contemplating using a gifted deposit to buy a property in the UK, here are a few steps to simplify the process:

1. Discuss with Your Giver: Open discussions with your family or friends about their willingness to provide a gifted deposit is the first step. Clarity about the terms can prevent miscommunication.
2. Understand the Implications: Ensure that both you and the giver are aware of any legal, financial, or tax implications. Seeking advice from professionals, such as financial advisors or solicitors, can offer additional insights.
3. Collect Necessary Documentation: Start gathering the necessary paperwork early to prepare for your mortgage application. Having everything in order can make the process much easier.
4. Find a Suitable Mortgage Lender: Not all lenders have the same policies regarding gifted deposits. Research and approach lenders that view gifted deposits favourably.
5. Professional Guidance: Consult with a mortgage broker who understands the nuances of transactions involving gifted deposits. They can guide you towards suitable options.

Conclusion

Navigating the real estate market in the UK can be daunting, especially for first-time buyers. However, using gifted money can provide a cushion to help make your property dreams a reality. By understanding the implications, the types of gifts, and how to properly document the process, you can set yourself up for success.

Whether you’re ready to find your perfect home or still in the early stages, knowing how gifted deposits work puts you one step closer to achieving your goals in the property market. Always make informed decisions, and don’t hesitate to seek expert advice. Your new home might be just around the corner!