House deposits and ‘The Bank of Mum and Dad’

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Gateley Legal NI

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Despite the world re-opening and the restrictions imposed by Covid-19 slowly becoming a thing of the past, the challenges faced by first time buyers hoping to get on the property ladder are ever present.

The rate of inflation is continually climbing towards a 40-year-high of 10.1%, forcing UK average house prices to increase. This factor, paired with the unfolding ‘cost of living crisis’ and the recent hike in interest rates by the Bank of England has forced some adults to move back in with their parents, making the prospect of buying their first home increasingly unrealistic.

This article provides some basic guidance regarding deposits coming from parents or other third parties.

Can my parents gift me a deposit for a house?

As returns to the family home continue to rise, many parents feel obliged to financially support their children. The so-called ‘Bank of Mum and Dad’ has enabled many children to achieve their ambition of becoming homeowners by providing the generous ‘gift’ of a deposit for a house. For those lucky enough to receive such a gift, this is a perfectly acceptable way to buy a home in our ever-inflated housing market. However, when this ‘gift’ becomes a loan from ‘The Bank of Mum and Dad’, mortgage lenders are less inclined to see it as a generous act of love from parents.

Gift v loan

It is extremely important to ensure that a gift from ‘The Bank of Mum and Dad’ does not get confused with a loan. Parents who wish to provide their children with a deposit for a house must declare that the deposit is in fact a gift. This declaration can be made by way of a gift form or gift waiver, prepared by the purchaser’s solicitor. When a parent signs the gift form or waiver, they are declaring that they are providing a gift that is not repayable and that they do not seek any interest in the property being purchased. The gift form/ waiver will be sent to the lender as part of their child’s application for a mortgage, therefore ensuring total transparency of the source of the funds for the deposit.

Can only parents provide a gift?

This process is not restricted to parents as lenders will be inclined to accept gifts from most relatives including grandparents and siblings. However, it must be noted that the same process applies and the donor of the gift will be required to sign a gift form/ waiver to state that they do not require the monies to be paid back. The donor should be prepared to go through the solicitor’s money laundering procedures and will be required to provide evidence of where the gift has come from and how it has been accumulated.

Implications of gifts

In the UK there may be tax implications for relatives who wish to gift a deposit for a house, and it is important that the appropriate tax advice is obtained at the time of making the gift – how does this affect the donor’s inheritance or estate planning position and their own position as regards to annual exemptions?

It is also important that parents and any other donors are fully advised on what happens if their child is buying the property with another individual. While there can be much excitement at the outset, the consequences of life events such as marriage, divorce, a death or a bankruptcy of one of the homeowners must be considered. 

What happens to the ‘gift’ can become a litigated matter if all does not go according to plan. It is therefore vital that parents and donors of gifts receive independent legal advice from a solicitor when it comes to gifts/ loans of deposit monies.

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