TL;DR
What you should know from this insight:
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a gifted deposit is when a homebuyer is given money by a third party, often a relative, to put towards their house deposit
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a gifted deposit will only be a true gift if there is no expectation of repayment
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a mortgage lender will require a signed gifted deposit letter if you have been given a gifted deposit
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if it is not clear that the gifted deposit is a true gift, it may be considered a loan or a resulting trust may arise over the property you purchased with the gifted deposit
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if the donor (ie the person who is gifting the deposit) passes away within seven years of providing the gifted deposit, it may be subject to inheritance tax implications
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parents can protect any gifted deposit in the event that their child separates from their partner by declaring a trust, or by producing a personalised loan agreement or promissory note
What is a gifted deposit?
A gifted deposit is when someone gives a buyer money to put towards their deposit when purchasing a house or flat. It’s most commonly given by parents, grandparents, or other close family members who want to help their loved one get on the property ladder.
The money is usually used to increase the buyer’s deposit, which can improve their chances of getting a mortgage or unlock better mortgage rates. With rising property prices and strict lending criteria, gifted deposits have become an increasingly common way for families to support first-time buyers.
How does a gifted deposit work?
For a gifted deposit to be a true gift, it must be given with no expectation of repayment.
The alternative is a family loan, which creates a legal debt that is expected to be repaid, even if the terms are informal. If your parents give you a deposit as a loan, it is not considered a gifted deposit, as it will eventually need to be repaid.
When deciding a dispute, a court will look for the original intention behind the payment. It's important to remember that even informal evidence counts. For example, a simple text message saying ‘here’s the money for the deposit, pay us back when you can’ could be used to classify the money as a loan.
Ultimately, whether the deposit contribution from parents is a gift or a loan depends entirely on the initial agreement between the parties involved.
What is a gifted deposit letter, and why do I need one?
When you apply for a mortgage in the UK, your mortgage lender needs to be certain that your deposit money is genuinely yours. If your deposit was a gift, your lender will require the person who gave you the money to sign a gifted deposit letter (also known as a ‘gifted deposit declaration’).
This is a formal declaration confirming that the money is an unconditional gift, that they have no right to ever ask for it back, and that they will not hold any legal interest or charge over your property. It is crucial that this declaration is truthful. If the money is secretly intended as a loan, signing a gifted deposit letter could be considered mortgage fraud under the Fraud Act 2006.
Can my parents ask for the gifted deposit back?
This entirely depends on how the money was given.
If it was a true gift, and especially if it was documented with a gift deed or a gifted deposit letter, then your parents have no legal right to demand the money back. The gift is irrevocable.
If the money was a loan and documented with a loan agreement or Promissory note, then your parents are entitled to have it repaid according to the terms of that agreement.
If there is no documentation, you enter a grey area. A parent could try to argue in court that the money was a loan or that they should have a share in your property through a ‘resulting trust’. This is why clear documentation is so important.
Use our Bespoke drafting service if you require a personalised loan drafted by a Legal Pro for your specific needs.
What is a resulting trust?
A resulting trust is a type of trust imposed by the law (ie the courts) in certain situations. Resulting trusts arise when an asset (eg a flat or a bank account) is held in the name of person A, but the true owner of the asset (in full or in part) is person B, due to their contribution to the asset’s purchase price.
In other words, if a person contributes a significant amount of money to help buy a property but isn't named as a legal owner, there’s a possibility the law may 'presume' they did not intend to give the money away as a pure gift. Instead, it presumes they intended to retain a share in the property, proportional to their contribution. This legal presumption can be challenged, but it requires strong evidence to prove that the money was intended as an outright gift with no strings attached.
Are there tax implications for a gifted deposit?
For you, as the recipient of the gift, there is no income tax or capital gains tax to pay. However, there are potential inheritance tax (IHT) implications for your parents who gave the gift.
In the UK, a gift of this nature is known as a ‘potentially exempt transfer’ or ‘PET’ for short. This means:
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if the parent lives for seven years after giving you the gift, it becomes fully exempt, and no IHT will be due on it
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if the parent passes away within seven years of making the gift, the value of the gift may be added to their estate for IHT calculation purposes
It’s worth noting that everyone has an annual gift allowance (£3,000 per tax year), which is immediately exempt from IHT.
For more information, read Inheritance tax. Bear in mind that this is a complex area, and if the gift is very large, your parents may wish to seek independent financial advice.
How can I protect the gifted deposit from a separation?
Parents often want to help their child without their future ex-partner being able to claim half of the gift if the relationship ends. There are two primary ways to achieve this:
1. A declaration of trust
The most common and effective method is to use a Declaration of trust - beneficial interest. It’s a legal document that you and your partner sign when you buy the property to record your parents’ contribution to the purchase without naming them on the mortgage deed. A declaration of trust can be drafted to state that if the property is sold, the original gifted deposit sum is returned to the parents who contributed the deposit, before the remaining equity is divided. For more information, read Declarations of trust for property.
2. A personalised loan agreement or promissory note
By using a personalised loan agreement or Promissory note, the money is treated as a formal loan from the parents to the couple, and it becomes a liability. In a separation, this debt would need to be repaid to the parents from the sale proceeds before the remaining assets are split. For more information, read Loan agreements and promissory notes.
Discussing legal documents with family when buying a home can feel uncomfortable. The key is to frame it not as a sign of mistrust but as an act of responsible planning for the future. By having a clear and open conversation and getting everything recorded in writing, you ensure that a generous gift is properly protected and that everyone involved can move forward with confidence and peace of mind.
Remember that you can always Ask a lawyer if you have any questions or concerns about gifting or receiving a deposit for a property purchase.
