Property law – Gifting a deposit to your children to buy a house – what steps need to be put in place?

As the property market is due to peak from a downturn, more and more buyers are obtaining gifts and loans from parents. Our team of legal experts explore the advantages and legal issues that arise from gifting a deposit to buy a house.

If you can give your child cash to use as a deposit, you can simply put the money in their bank account. They can then put the cash gift down as a deposit and take out a mortgage in their own name to purchase the property.

At the Land Registry your child would be listed as the owner of the property, they would be required to pay the standard level of Stamp Duty and would be responsible for paying the mortgage. Your involvement as a financier would be over.
You might want to formalise the gift through a Deed of Gift document; this serves as evidence that you gave the deposit funds as a gift, not a loan. In fact, if your child is also using a mortgage to fund their purchase, their lender will insist that you do so.

Gifting the growth in equity

Alternatively, you could try gifting a property to a family member. In this instance, you would buy the property in your name. You would be the one to take out the mortgage. In this case, you would be listed on the Land Registry as the owners of the property. It would be advisable to put in place a Declaration of Trust gifting some or all of the equity to your child. The amount of equity may then increase if there is an increase in property values and/or a decrease in the mortgage debt.

Gifting property to a family member in this way can be very useful; for example, when perhaps your child does not earn sufficient funds to qualify for a mortgage. It would then be a personal arrangement between you and your child as to whether your child would effectively have a ‘joint mortgage with parents’ and contribute to the ongoing mortgage payments. However, since your child was not part of the mortgage arrangement, the payments would be deemed to have come from you. With a Declaration of Trust in place showing that the increase in equity belongs to your child and not to you, your child would not lose out in this arrangement.

If you give your child equity, your name is on the Land Registry and the property cannot be sold unless you sign the sale documents. You therefore have more control.
However, you will have to pay a higher Stamp Duty Land Tax if you already own a property.

Life is more complicated if your child is living with a partner. This is true whether or not they are buying the property with your child. We have solutions to these problems. Please click through to Cohabitation Agreements and Declarations of Trust.

Evidence of a gift as opposed to a loan

The gifts that you are giving to your child will be evaluated on the date of your death. There needs to be firm evidence that funds were gifts rather than loans. Otherwise, it could be claimed that the sums should be repaid in full to your estate. If your gift is a cash gift you will need to sign a Deed of Gift evidencing this fact. If it is a gift of equity then the Declaration of Trust will suffice.

Banks and building societies require the buyer to provide written proof that the deposit has been gifted. That would make it non-refundable and unconditional. They need to know that they can repossess the property in an uncomplicated way if the borrower is unable to meet their repayments. If all of the above is in order, most lenders will be happy to accept gifted deposits as long as they are outright gifts and no other party has an interest in the property.

Be aware that lenders are likely to require all of the following information:

• Full details of all gifted deposits, including whether they have been provided by non-family members. They are less likely to be accepted.
• Whether the donors are UK residents and whether their funds are held in a UK bank or building society
• Whether the gifted funds are going towards a buy-to-let property
• A full explanation of how the balance of the purchase price will be met, typically from salary

Evidence of a gift as opposed to a loan

You may equalise your estate amongst your children, taking into account any lifetime gifts that have been made. This gives an equal share to all of your children adding in previous lifetime gifts. Upon your death, unequal amounts of residue are paid to individual children, in essence, equalising your estate.

Legal advice for buying a house with the help of parents

Buying a house with parents’ money raises many questions. You might be looking to buy with a family loan or gift property to a family member. Maybe you are considering taking a joint mortgage with your parents. Or there may be some other kind of ‘Bank of Mum and Dad’ transaction you have in mind. Our property lawyers can help you explore all your options.