What is a ‘Gifted Deposit’?
The first kind of 'gifted deposit,' known as a 'Seller's gifted deposit,' occurs when the seller offers a portion of the purchase price back to the buyers, either as a discount or a deposit. This can happen when a seller, like a housebuilder, reduces or eliminates the deposit required from the buyers at the contract exchange, or when the seller contributes to or refunds part of the purchase price upon completion.
The second kind, termed a 'Family gifted deposit,' involves the buyers receiving a portion of the purchase price from another party, typically a family member. For instance, the buyers' parents may provide all or part of the deposit at the contract exchange, or supply the additional funds needed to supplement the mortgage loan for the property purchase. The individual providing the funds is referred to as the 'gifter.'
Seller’s gifted deposit
A seller's gifted deposit essentially acts as a price reduction. If the sale is within the family, it's crucial to disclose all details since lenders must be informed of such arrangements. This could influence the loan amount, as lenders often have policies limiting loans to a certain percentage (e.g., 75%) of the property's reduced price, not its original price. Lenders may suspect price inflation. Additionally, some lenders may refuse to provide loans if an unrelated seller offers a 'gifted deposit' to decrease the sum owed at completion.
It's imperative to inform your conveyancer, mortgage broker, or mortgage company about any gifted deposit plans from the start. If the lender adjusts the mortgage offer and you're unable to cover the shortfall, purchasing the property may become unfeasible.
Family gifted deposits
It's not uncommon for one or both sets of parents to assist buyers in purchasing a property by providing some funds. This financial aid can be given prior to the purchase, at the exchange of contracts, or upon completion. These contributions are often referred to as 'gifted deposits.' Both the buyers and the person providing the gift should consider several important points. In certain situations, the donor may also need to seek independent legal advice.
Is it a true gift - or is it really just a loan?
If the money is ever repayable, or if any interest or notional interest is payable on it, then it is not a gifted deposit but essentially a loan. Lenders typically require the 'gifter' to provide written confirmation that the gift comes without strings attached and is non-repayable, not even upon the sale of the property. Generally, lenders are not willing to accept the 'gifter' having a second mortgage or charge on the property as security for any claim to a portion of the purchase price.
Does the ‘gifter’ expect some rights in the property?
If the 'gifter' expects to receive the money back (or a portion of the sale proceeds) when the property is sold, or if the buyers' relationship dissolves, then this does not constitute a true 'gifted deposit' scenario. It may, in fact, be a situation of 'trust'. The complication arises if the 'gifter' later contends that the buyers are holding the property in trust for both themselves and the 'gifter'. Generally, lenders are unwilling to accept a mortgage or charge from the 'gifter' to safeguard their purported share of the property, nor a trust deed that stipulates the buyers are holding the property in trust for both parties.
Gifters' will have no control over the property
Additionally, 'gifters' must acknowledge that they have no authority to dictate who visits or lives at the property, its sale conditions, the sale price, the works conducted on the property, nor do they have the right to visit, stay, or use the property or its address for any purpose. There have been instances where the buyers' relationship deteriorates, leading 'gifters' to attempt leveraging their 'gifted deposit' to restrict access to the property, such as barring a gifter's ex-partner or their child's ex-partner from visiting. If such a visit occurs, they argue the deposit should be repaid. However, lenders will never approve such terms, and buyers must clarify to 'gifters' that imposing control is not an acceptable condition of the gift.
Anti-Money Laundering
Your conveyancer must also address the 'anti-money laundering' concerns associated with gifted deposits. They need to ensure that the individual providing the deposit or offering a discount is not using funds potentially derived from criminal activities. They will require bank statements to verify the origin of the 'gifter's' funds being given to the buyers. This may necessitate historical statements and records from any intermediary accounts through which the money has been transferred. It involves demonstrating the 'gifter's' consistent savings into the account from which the funds originate. It is not sufficient for gifters to present a bank statement that merely shows the funds entering the 'gifter’s' account from another, then immediately transferring to the buyers. In such instances, bank statements from the originating account, and possibly from any connected accounts, must also be provided.
Proof of identity
Conveyancers must verify the identity of the 'gifter' just as they do with you. They may need to visit the conveyancer's office or provide passports, driving licenses, and utility bills to prove their identity, similar to your own verification process. It's important to understand that there are severe criminal penalties for conveyancers who neglect these checks, so this is not unfair or unnecessary scrutiny by your conveyancers.
Overseas funds
Funds transferred from offshore or overseas accounts by the 'gifter' are also subject to verification requirements. It is necessary to demonstrate the origin of the money and to prove that the 'gifter' acquired the funds legitimately.
Don’t pay it to us!
The 'gifter' must not transfer the gifted deposit directly to us under any circumstances. Instead, they should transfer it to you, enabling you to pay us the deposit upon the exchange of contracts or the remaining balance prior to the completion of the purchase. We cannot, in effect, serve as a banking service for anyone.
Inheritances
If buyers or 'gifters' have inherited money or received a 'gifted deposit' from a family trust, the same rules apply. Confirmation is required that it is a no-strings-attached gift or bequest from the representatives or lawyers managing the trust or the estate of the deceased.
Standard confirmation letter for completion by ‘gifter’
Your conveyancers can provide a template letter that must be signed by the 'gifters' at a minimum. Typically, lenders require the 'gifters' to sign this letter to affirm that the deposit is a genuine gift and not subject to repayment under any conditions. Should the 'gifters' have queries or seek advice regarding this letter, they must consult an independent solicitor, as the buyer’s conveyancers cannot counsel them on its content.
What would happen if the ‘gifter’ dies within 7 years?
If the 'gifter' passes away within seven years of giving a gift, it may be subject to Inheritance Tax, for which the recipients could be liable. To mitigate this concern, one might consider obtaining life insurance on the 'gifter' to cover the potential tax liability.
What would happen if the ‘gifter’ goes bankrupt later?
If the 'gifter' was insolvent when the gift was made, or becomes bankrupt within five years, there's a slight chance that the 'gifter’s' bankruptcy trustee might attempt to recover the gift. While this is rare in practice, based on certain risk factors such as the gift's value, your conveyancer or mortgage lender might insist on an Insolvency Act Indemnity Policy to mitigate this risk. Regardless, your conveyancer will conduct a bankruptcy search on the 'gifter' prior to completion.
Land registration
In the case of a ‘Seller’s gifted deposit’ the Land Registry say they will require the legal transfer deed to state the reduced price after the discount (since this is the true price being paid for the property).
Where there is a ‘Family gifted deposit’ then the full price paid will be shown in the transfer as normal.
SDLT (England)& LTT (Wales)
Conversely, where there is a ‘Seller’s gifted deposit’ then HMRC have stated they regard this as part of the ‘chargeable consideration’ and therefore SDLT/LTT will be paid on the gross amount. There is clearly conflict between the Land Registry and HMRC views on what price should be stated in the transfer, so one solution is to expressly set out each aspect of the ‘consideration’ in the transfer.
Where there is a ‘Family gifted deposit’ then SDLT/LTT will be payable on the full price since the gifted deposit will not be relevant to the ‘consideration’ paid by the buyers for the property to the seller.
As always, if you have any questions on this, then please contact us.
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