Helping the next generation get on the property ladder: Gifting vs loaning a deposit

For first time buyers, getting on the property ladder can be tough. In England, the average house price is eight times average yearly earnings. In London, the multiple is just under 12 times.

As a result, more people are willing to give a helping hand to the next generation when it comes to the deposit. Two common ways are to gift money towards a deposit or loan it. We caught up with wealth manager Dasha Plotnikova and Oportfolio’s senior mortgage & protection adviser Jade Pinkerton about gifting and loaning a deposit.

What is the difference between a gifted and a loaned deposit?

Dasha: A gifted deposit is where there is no expectation of the money being returned. If you are making the gift, you are giving up access to and control of the money. If you fall out with the recipient or realise that you actually need the cash in the future, it can be very difficult to revoke the gift.

With a loan, on the other hand, there is an expectation that the money will be repaid. It is worth considering when the loan would need to be repaid and whether you would charge interest.

Can anyone gift or loan a deposit?

Jade: Generally most lenders will only accept a gifted or loaned deposit from close family relations. Parents are the most accepted, but some lenders will also accept other close relatives such as siblings, grandparents, aunts and uncles.

Lenders tend to not accept the deposit from non-family members such as friends.

If I gifted or loaned a deposit, how would this affect my estate from an inheritance tax perspective?

Dasha: The first thing to consider is whether your estate is likely to be liable for inheritance tax (IHT).

Simply put, there is no inheritance tax paid on the first £325,000 you leave when you die. On top of that, if you leave your main residence to your direct descendants (children, step-children, grandchildren), you usually get another £175,000 – so a total of £500,000.

This amount can be doubled if your spouse passed away, didn’t use their allowances and left everything to you. So in some cases an estate is liable for IHT when it is worth over £1m.

If you would like to gift a deposit during your lifetime (so not leaving it in your Will), then you could take advantage of some IHT exemptions.

Annual exemption

You could gift money gradually using the annual £3,000 exemption. This is where the first £3,000 that you gift within a tax year is exempt. If you didn’t make any gifts in the previous tax year, you could carry forward the exemption by one year (only) to give a £6,000 exempt amount.

So if two parents haven’t made any previous gifts to anyone in the previous or current tax year, then each parent could gift £6,000 to their child, meaning a total of £12,000 could be gifted tax-free.

Gifting out of “excess income”

You could gradually gift money out of your “excess income”. In other words, if your income is higher than your usual spending, you could gift some of that income IHT-free. There are a few caveats to this such as:

The gifting needs to be regular (but there are no strict rules about how regular e.g. monthly, annually).
It must come out of your post-tax income (not capital).
The gifting must not adversely affect your living standards.

Potential Exempt Transfer (PET)

PETs are a popular way to make gifts. If you gift a lump sum to your child and survive for 7 years from the date of the gift, then the gift will fall out of your taxable estate on death. This is also commonly referred to as the “seven-year rule”.

If you don’t survive 7 years and your estate is liable for IHT, then the IHT charge could be reduced depending on how many years you survived since the gift.

Loaned deposit

If you are loaning a deposit, then the amount of your loan outstanding remains in your estate for IHT purposes.

You don’t have to charge interest on the loan, and many family loans are made interest-free. If you do charge interest, be aware that the interest payments received by you will be taxable income and may be subject to income tax.

It is worth highlighting that if you waive the debt, it then becomes a gift. It will be from this date – not when the loan was made – that the gift is treated as a potentially exempt transfer.

How is a gifted deposit viewed by mortgage providers?

Jade: In terms of mortgage availability, there is almost no impact whatsoever. Lots of people have gifted deposits from parents and for most people it doesn’t impact the lender or rates available to them at all. However, there is the occasional case where lenders will not offer certain rates or mortgage schemes to clients that have a gifted deposit.

Where part of the deposit is a gift, the lenders will need to know the detail and they’ll have specific requirements. Some lenders are more lenient than others. For instance, some have a specific form they need completing, others will be satisfied with a letter that we can help clients draw up. Some lenders will want to see the giftee’s bank account showing the funds, while others don’t. So depending on how quickly the mortgage needs to be agreed may impact which lender we recommend for each situation. Regardless, the solicitors will likely require a thorough trail for the source of funds.

How is a loaned deposit viewed by mortgage providers?

Jade: The effect on mortgage availability depends on the lender.

Some lenders will not accept a loan as a deposit option, others will accept it but have certain requirements and will need to know the full details e.g. the terms of the loan. They will likely count the loaned deposit as a financial commitment and consider that in the mortgage affordability assessment. So in some cases it may impact the size of the loan available to the client, as well as the number of lenders that would consider the case.

The lenders require the first legal charge on the property – that is key.

Does there need to be evidence of a loan agreement? And does a solicitor need to draft it?

Jade: If the loan from a family member is formalised, the lender requirements can vary. Although this does happen, we don’t come across it very often. The reason is that having a formal agreement can impact the number of lenders that will accept a mortgage and the mortgage size available.

It is likely that some clients may have an informal agreement with their parents with regards to loan repayment in order to keep their mortgage options open.

We have known clients organise the gifted /loaned deposit agreements with certain restrictions on the money e.g. the money being loaned by parents has no regular payments or interest associated with it, but it needs to be paid back on the sale of the property. This way the parents feel comfortable the money is protected against any future partners, and they keep some element of control while not impacting their child’s mortgage affordability. The solicitors can set this up as part of a trust agreement.

Is there a minimum or a maximum that can be gifted or loaned?

Jade: The short answer is ‘no’. But again, this will vary from lender to lender.

Some do not accept a case if the whole deposit is coming from a gift – they want the clients to have saved some money. Others do not have this requirement.

I would like to help the next generation get on the property ladder, but I am not sure whether I have enough to gift a deposit.

Dasha: Cash flow planning could be very helpful here. It’s a way to visualise a person’s financial situation over time. It is often used to answer the “let’s see…” questions such as “let’s see whether I can afford to gift this amount / retire / renovate the house”.

We believe that cash flow planning can be such a useful tool that we are very proud to offer it on a complimentary basis.

If the conclusion is that you don’t have enough to gift, then another option to consider is loaning the deposit. If the loan is repayable on demand, you would have a degree of access to it should you need it in the future. But, as Jade says, a loaned deposit has an impact on mortgage affordability and not all lenders would accept it.

How can a mortgage broker help a first-time buyer with a gifted or loan deposit?

Jade: An independent mortgage adviser can make all the difference with regards to planning for a mortgage. They will talk you through all the different options and strategies available to you, including if you have a gifted deposit or a loan agreement in place.

They will progress with the most appropriate lender for your situation and should help make the mortgage application as smooth as possible.

We will always conduct as many pre-application checks as possible. This includes checking the lending criteria, speaking to the lending and case handling teams at each bank, and liaising with our senior contacts at the banks (in case they would be willing to make any discretionary allowances or offer thoughts on how to package the case to ensure the smoothest process).

This way, clients don’t waste several weeks applying for a mortgage that will get declined further down the line, or get a mortgage offer agreed which is then withdrawn when they are close to exchanging contracts etc. This would be very stressful for clients; it could result in the purchase being delayed or the chain falling through, and it could also potentially negatively impact their credit score.

So my advice would definitely be to make sure you get advice.

You will have someone looking after your case, your credit score and talking you through your options. It will take away some of the stress and helps stop problematic situations arising.

Mortgage advisers can also help you secure the most cost-effective mortgage rate and product in the short term, but also consider long term planning too.

Thank you very much to Jade and Dasha for their insights. If you have any questions in relation to the above, please do not hesitate to get in touch.

Risk warning: With investing, your capital is at risk. Tax treatment depends on individual circumstances and may be subject to change. Opinions constitute our judgement as of this date and are subject to change without warning. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person. Your property may be repossessed if you do not keep up with your mortgage payments.