The financial pitfalls of gifting a deposit

By July 27, 2023Tax Planning
Graphic of a house wrapped in ribbon held by a hand, representing the gifting of a house deposit

With mortgage rates hitting levels not seen in fifteen years, and house prices remaining close to record highs, taking the first step to owning property is becoming more difficult than ever for first-time buyers. Many find themselves under further pressure to purchase as a result of rising rents, which are increasing on the back of more expensive borrowing costs for landlords, and the general rise in the cost of energy, food and transport.

In this situation, parents and grandparents often take the view that gifting funds to younger family members, to help towards a deposit or provide assistance with other housing related costs, can be seen as an advance on a future inheritance.


The bank is open for business

The “Bank of Mum and Dad” is one of the UK’s largest lenders in terms of the value of gifts and loans arranged. According to data from Legal & General, around £9.8bn was gifted by the Bank of Mum and Dad in 2021 alone. The spike in mortgage rates, general increase in the cost of living, and high house prices is likely to drive the lending stream from the parental bank even higher this year. The trend of helping family with housing costs could be one of the factors behind the fastest ever drawdown from UK savings accounts. The Bank of England reported households withdrew a net £4.6bn from banks and building societies in the month of May, reversing a trend that has seen savings gradually increase over time.

We understand parents and grandparents are keen to provide assistance, and in many cases, the gifted funds can make a substantial difference to the prospects of a first-time buyer being able to secure a property, and also potentially taking out a smaller mortgage in the process. There are, however, a number of pitfalls that parents and grandparents need to consider before parting with their cash.


Tax considerations

Any gift – be it by way of a deposit for a house or for another purpose – could potentially be liable to Inheritance Tax. Each individual can make gifts of £3,000 per tax year and therefore a married couple could gift £6,000 of capital (plus £3,000 each from the previous tax year if not used) without any Inheritance Tax concerns. Any amount gifted above this exempted amount is treated as a Potentially Exempt Transfer (PET). Whilst no Inheritance Tax is due immediately, the person making the gift needs to live seven years from the date the gift is made, for the gift to fully escape Inheritance Tax.

Other than the annual gift exemption, when your child gets married, parents can provide a wedding gift of £5,000 each and grandparents can give £2,500 each, free from Inheritance Tax concerns. In addition, if you receive more income than you need to live on, you may be able to make regular gifts out of surplus income. The rules here are complex and we recommend seeking advice if you intend to start a regime of gifting out of excess income.

Depending on the source of the gifted funds, there may be other tax considerations, such as a potential Capital Gains Tax liability that could arise if shares or investments are sold to provide the funds, or an investment property is sold. It is important to recognise that any such liability will fall on the parent or grandparent who is making the gift.


Keep it in the family

Another pitfall is the potential for relationship or marital breakdown. Parental gifts are often provided to children who intend to purchase a property with a partner or spouse. It is important to consider what would happen in the event of relationship breakdown, which could potentially lead to the other party walking off with part or all of the value of the gift. Taking appropriate legal advice, and preparing a suitable Declaration of Trust that protects the value of the gift, could avoid this situation arising.

Parents and grandparents would also be well advised to consider the effect that unequal gifts could have on younger family members. Many are keen to treat family members equally, and this may be impossible at the time the gifted deposit is made. Furthermore, other family members may be too young to receive funds, or may not be in need of capital at the same time. This is where the use of Trusts can be helpful. By creating a Trust, family members can be named as beneficiaries and the Trustees can pass assets to them at the appropriate time. Trust planning does have a number of drawbacks and is, again, a complex area that often requires taking specialist financial and legal advice.


Looking after your interests

Whilst parents and grandparents often want to be generous in helping younger family members, we often find that their own needs and requirements are not properly considered. Parents need to carefully review their own financial needs in later life, and consider the impact that gifting funds could have on their ability to fund a comfortable retirement. It is also important to consider that the capital gifted will no longer be available to the parents or grandparents to cover any unexpected expenditure. As many will require some form of care in later life, gifting capital could reduce the level of care or support that can be afforded. It is worth remembering that it is unlikely that the recipient of the gift will be in a financial position to return the favour if funds are required.


Seek financial and legal advice

There are a number of financial and legal considerations that need careful thought before providing gifts or loans to family members to assist them to purchase a property. It is a good idea to seek legal advice to protect “family wealth” from a potential relationship breakdown, and also look at the implications the gift may have on any existing Will in place.

At FAS, we can provide assistance to parents and grandparents who wish to use their funds to help younger family members. We can advise on which assets are gifted, and the potential financial impact of any actions taken on their financial security.

Speak to one of our experienced advisers here to start a conversation.