Using the "bank of Mum & Dad" for a gifted deposit on a residential property transaction

Residential Property Technician, Chloe Hawkes, discusses the use of a gifted deposit in respect of a residential property purchase, and in what manner that gift can be used.

What is a gift or gifted deposit?

A gift is when a party, who is not a purchaser of the property in question, provides a monetary contribution towards the purchase price. This differs from a loan as a gift is non-repayable.

In the majority of transactions, a 10% exchange deposit is usually required under the Standard Conditions of Sale (Fifth Edition) which will be incorporated into the contract. However, it should be noted that in Help to Buy matters, 95% mortgage transactions and some shared ownership purchases, a 5% deposit is acceptable.

This 10% deposit on exchange is different to what is deemed to be your deposit by a mortgage lender as you can contribute more capital to a purchase than just 5 or 10% to enable you to have a lower Loan to Value for mortgage purposes. A gifted deposit does not necessarily need to be for the exchange deposit alone as it could be utilised for additional equity, or both.

If you are receiving, or have already received funds from a relative, including the bank of mum and dad, that you are using to assist you in purchasing the property, it is likely for the purposes of the transaction that this will be deemed to be a gifted deposit.

Who can provide me with a gifted deposit? The bank of mum and dad?

Technically speaking, anyone could be a Giftor. However, in most instances a mortgage lender will not allow a gift from just anyone. Lenders tend to favour direct or step relatives such as parents (or the bank of Mum and Dad), grandparents and siblings. Spouses, domestic partners or parties who are engaged, with the intention to be married, are also usually accepted by lenders.

Each lender has their own specific requirements of which are listed within the UK Finance Mortgage Lender Handbook (UKFML) of which the acting conveyancer must adhere to when they act for the mortgage lender. In many conveyancing transactions, your conveyancer will represent both you and your lender.

If a gifted deposit is coming from a party that is not a direct relative, or the lender’s specific requirements for not needing to report a gift cannot be met, then it is likely your residential conveyancer will need to notify the lender of the gift details. The lender would need to provide a written response confirming they are happy with the gift before your conveyancer could progress matters.  

In most cases, an overseas gift, or a gift from a party who is not directly related to you, will need to be reported to the mortgage lender. Written confirmation would be required from the mortgage lender confirming they are happy to proceed before the transaction could progress.

What does a gift donor need to provide?

A Giftor will need to verify their identity and address in the same way you have to, in order to comply with Anti Money Laundering Laws and Legislation, in addition to mortgage lender requirements. The Giftor will need to provide evidence to show they hold the funds they are providing to you and provide documents to confirm the source of their funding. There are also certain declarations that must be made by the Giftor. These declarations are especially crucial when a mortgage lender is involved in a transaction. The below points are typically what mortgage lenders require confirmation of:

• That the gift is non-repayable
• That the Giftor will not occupy the property
• That the Giftor has no reason to believe they will become insolvent
• That the Giftor will not hold a charge over the property or bear any interest in it
• That the gift will not prejudice the security of the mortgage company
• That the acting conveyancer has carried out all appropriate checks on the Giftor, they are satisfied with the Giftor’s funding and that the conveyancer is holding a cleared bankruptcy search against the Giftor

Additional points regarding gifted deposits

It is strongly recommended that a Giftor obtains independent legal advice before providing any contributions so they can ascertain their legal position. The firm acting for you as the purchaser cannot also provide advice to the Giftor as this would be a conflict of interest.  Gifts of this nature can have an impact on future estate planning for the Giftor.

The recipient of a gifted deposit also needs to be aware that in the event the Giftor dies within 7 years of giving a gift that Inheritance tax may become payable on that sum if the Giftors estate attracts such tax.

Any funds being gifted must be transferred into the buyer’s personal account before they are sent to Holmes & Hills’ client account. You would have been provided with our bank details at the outset of the transaction. Our details will not change throughout the course of the transaction unless you are notified in writing by letter, at your home address. Should you have any queries concerning our account details, please call your conveyancer.

Monetary gifts being utilised to pay for furniture, third party costs and disbursements are not deemed to be a gift. This is because the funds are not being contributed towards the purchase price of the property and your conveyancer is not required to check these funds. If you are unsure whether the funds you are using could be deemed a gift, please contact your conveyancer directly.