Buying a new home is an exciting milestone, but it can also be financially daunting, especially for first-time buyers. For some fortunate individuals, parental support can make the dream of homeownership a reality. If you find yourself in a situation where your parents are gifting you the deposit for your new build, it’s essential to understand the legal implications and potential considerations associated with this financial assistance.
A Gift or a Loan?
The first crucial aspect to clarify is whether the money your parents are providing is a genuine gift or a loan. A gift is a sum of money given freely, without the expectation of repayment. In contrast, a loan requires a formal agreement stating the terms of repayment, including interest rates and a schedule for returning the borrowed funds. Misunderstandings or lack of clarity can lead to complications down the line, so it’s crucial to have an open and honest conversation with your parents about their intentions.
Gifts and Tax Implications:
Generally, if the gifted deposit exceeds a certain threshold, it may be subject to inheritance tax (IHT). However, there’s usually no immediate tax liability for the recipient of the gift. It’s essential to consider the potential implications if the parent gifting the deposit passes away within seven years of making the gift, as it may still be subject to IHT. Additionally, if the gifted deposit is used to generate rental income, the recipient may be liable for income tax on the rental profits. Seeking advice from a tax professional or solicitor is advisable to ensure compliance with UK tax laws and to understand any potential implications fully.
If your parents are indeed gifting you the deposit, we will ask for the donor to sign a gifted deposit declaration. We will also carry out AML checks on the donor and ask them about the source of funds.
Lenders and Mortgage Applications:
When seeking a mortgage to finance your new build, be aware that lenders typically scrutinise the source of your deposit funds. A gifted deposit is generally acceptable to most lenders, provided that the gift is genuine and is not a loan in disguise. However, some lenders may impose specific requirements, such as ensuring the gift is given without any conditions or expectations of repayment.
To increase your chances of a smooth mortgage application process, make sure you have a written gift letter from your parents, stating the amount gifted, the fact that it is a non-repayable gift, and that they have no financial interest in the property.
Consider Future Implications:
While accepting financial support from your parents can be a great boost, it’s essential to consider the potential implications on your future financial situation. Take the time to evaluate whether you can comfortably afford the ongoing mortgage payments, property maintenance costs, and other associated expenses without relying solely on parental support.
Additionally, think about how the gift could impact your relationship with your parents. Discuss any expectations or concerns openly and honestly and ensure that all parties involved understand their roles and responsibilities.
Receiving a gift from your parents for the deposit on your new build can be an incredible opportunity to step onto the property ladder. However, it’s vital to approach the situation with a clear understanding of the legalities involved. Understanding potential tax implications and addressing any lender requirements will help make the process smoother. Remember to consider the long-term financial implications and communicate openly with your parents to ensure a positive and successful home buying experience.
If you are looking at buying a new build home and your parents are helping out, contact out friendly and efficient New Build property team today. We also have a dedicated team for properties that are not New Build homes.
