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Thinking of borrowing a deposit from family to buy a house?

Buying or Selling a house

Buying and selling property

It may be that you are borrowing the deposit money for a property purchase from someone, or they are gifting it to you.  This is often the “Bank of Mum and Dad”. In this article we will talk about mum and dad being the ones funding a deposit for one of their children, but it could apply to other family members or friends.

Firstly, it is vital to be clear whether this is a gift, i.e., mum and dad do not ever expect the money back, or whether they are loaning it to their child and co-investing with them.

Very often mortgage companies will require it to be a gift. The reason for this is that they don’t want any other lender to have a claim on the property that they are also lending on. So, during the conveyancing process, if mum and dad are putting in a deposit the mortgage lender will usually insist on documents being signed to say that it is a gift. It is then legally a gift, and mum and dad would not legally be entitled to demand repayment.

The problem comes if mum and dad gift a deposit to their child and that child buys with a life partner. If their child’s relationship breaks up the ex-partner will get part of the benefit of the deposit because they are also owners of the house.

Also, if child and partner own the house as joint tenants then the partner will get it, including the value of the gifted deposit, if the child dies.

If you are buying a house the conveyancer should ask you whether you want to hold it as joint tenants or tenants in common. A joint tenancy means that you both own it in full together and if one dies then it automatically passes to the other. Tenants in common own a defined share of the property and can leave their share to beneficiaries in their will.

So, if mum and dad gift a deposit but want to avoid the value of it going to their child’s life partner then the property should be held as tenants in common and the property owners should have a deed of trust drawn up to say what the shares are and what happens to them, and the value of deposits, for example, if the property is sold. These arrangements can be quite complex, and it is sensible to have a solicitor draw them up for you. There will be extra charges on top of the conveyancing for that, but it may save heartache in the future if a relationship breaks up.

It is also worth being aware that if the child and their partner get married it is possible that, on divorce, the divorce courts may deal with the value of the property differently. They may, for example, consider the needs of children, but it may still be worth having a deed of trust to be clear about what everyone’s intentions on ownership are. If the parties to a marriage are bringing in different levels of assets, such as a big deposit from parents, it may be sensible to discuss with a solicitor whether a prenuptial or postnuptial agreement would be appropriate.

Even if shares in a property are split and a deed of trust is executed, that does not mean that mum and dad can get a deposit back if they have gifted it. If they have gifted it then they have given it away and a deed of trust just means that it should remain with their child rather than their child’s partner, especially if they are not married.

Aside from a desire to protect their child’s interest, if the child is borrowing the deposit, parents may want to invest in the property purchase to make a return themselves. In those circumstances they may not want to just gift the deposit.

If the parents do not want to outright gift it and a mortgage company will not fund the mortgage without the gift, then there may be other options to explore.

Mum and dad could become co-owners of the property and join the mortgage. However, they would then be jointly liable to pay the mortgage so would have to pay if their child, and/or partner stopped. It could also mean that they own a second house in addition to their own home which could mean higher stamp duty is payable and Capital gains tax would be payable when it is sold.

Another option instead of gifting a deposit could be to act as a guarantor on the child’s mortgage. But that means if they and/or their partner shopped paying the mortgage company could seek payment from mum and dad and even go as far as taking mum and dads own house to satisfy the debt.

Therefore, parents should think long and hard before taking out a joint mortgage with their children or acting as guarantors on a mortgage.

Finally, if parents do make a gift of a deposit that is treated as a taxable gift for inheritance tax purposes. That means that if the parents die within 7 years, then the gift could attract IHT. There are various reliefs and nil rates which may be available and would have to be considered.

As you can see these arrangements for assisting with a deposit can be complex and involve lots of issues, including tax. It would always be sensible to discuss with a solicitor, who may also suggest that you speak to an accountant, well before you get to the stage of purchasing the house.