Gifting the deposit
If you are able to 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 shown as the owner of the property, pay the standard level of Stamp Duty and would be responsible for paying the mortgage and your involvement as a financier would be over.
- As a gift you might want to formalise it through a Deed of Gift document to evidence that it was a gift not a loan. 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 buy the property in your name, but then you would be the one to take out the mortgage. In this case you would be on the Land Registry as the owners of the property and you could put in place a Declaration of Trust gifting some or all of the equity to your child and the amount of equity may then increase if there is an increase in property values and/or a decrease in the mortgage debt.
This is very useful for example where 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 contribute to the ongoing mortgage payments, although obviously 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 by this arrangement.
- If you were giving 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 higher Stamp Duty Land Tax if you already own a property.
Life is more complicated if your child is living with a partner who may or may not be buying the property with your child. We have solutions to these problems. Please click through to Cohabitation Agreements and Declarations of Trust.
Evidence of gift as opposed to loan
The gifts that you are giving to your child will be looked at, at the date of your death. There needs to be firm evidence that it was a gift rather than a loan otherwise it could be claimed that it 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.
Many banks and building societies require the buyer to provide this written proof that the deposit has been gifted and is non-refundable and unconditional – they need to know that they can repossess the property in an uncomplicated way in the event that 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 (these 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
As a gift, your contribution comes under the category of Potentially Exempt Transfers or PETs for short. These gifts may be subject to Inheritance Tax if you were to die within seven years of making the gift. You can find out more about PETs here.
Amending your Will in order to reflect the gifts
You may wish to equalise your estate amongst your children, taking into account any lifetime gifts that have been made. We have a specific clause that can be added to your Will which is commonly called a “hotchpotch” clause. This gives an equal share to all of your children adding in previous lifetime gifts so that, on death, unequal amounts of residue are paid to individual children, in essence, equalising your estate.
Please contact us if you need to know more. You can fill out our enquiry form and we will get back to you.
If you can’t find the information you are seeking or just want a fuller explanation please call us. We have a number of offices in and around London that may be convenient for you to contact but we will be able to help wherever you are based.