Is a Gifted Deposit Liable for Inheritance Tax?

Author:
Jamuna Rajah
Conveyancer
Date:
23/04/2019

Many first-time buyers need assistance from their parents to step onto the property ladder, and so gifting money for a house deposit is a popular option to help children.

Factors to consider when gifting a deposit are mortgage restrictions, legal rights of individuals and Anti-Money Laundering (AML) laws that need to be addressed in the Conveyancing process. Furthermore, buyers may need to repay the gifted money if the person gifting dies within seven years and their Estate is liable for Inheritance Tax.

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What is a Gifted Deposit?

A gifted deposit is a sum of money that is given by a family member forming all or part of a deposit for a buyer wanting to buy a property. It’s possible for friends to gift money to enable someone to buy a property, but this is less favourable for lenders.

Gifting money to buy a house or a flat should be done the right way, which includes following the right procedures. It also includes obtaining all the necessary legal documents to assure the lenders that the deposit is indeed a gift and not expected to be paid back.

A gifted deposit can be really useful for a first time buyer if you haven’t been able to save the minimum 5% you need for most mortgages, or to help you increase your deposit to 10% or 15% to secure a better mortgage deal.

A gifted deposit is a common way for parents, sometimes referred to as the Bank of Mum and Dad, to help their children buy a home, but as mentioned above, there are factors that both buyer and gift donor (parent/s) will have to address to ensure your mortgage lender is happy with the arrangement at the time of your mortgage application.

Is a Gifted Deposit Taxable?

You may have to pay Inheritance Tax (IHT) on a gift if the gift donor dies within seven years of handing over the money. Most gifts a donor makes to other people during their lifetime (unless they fall into the list of tax-free gifts) are classified as ‘potentially exempt transfers’ or PETs for short.

If the gift donor lives for seven years after making the gift, no Inheritance Tax is due. However, if they die within this time, the gift will be added to their Estate and reassessed for Inheritance Tax purposes against other PETs they have given and the tax-free allowance.

Potentially as a result of reassessment, the applicant may be liable to pay Inheritance Tax depending on individual circumstances.

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