Gifted Deposit Or A Loan | Options To Help Your Child Buy Their First Home

According to a recent survey, approximately half of first-time buyers receive financial help from family members. The ‘Your First Home’ scheme, recently set up by the Government, aims to make things easier for first-time buyers but, although welcome, many young people will still find it hard to get onto the property ladder. So, if you want to help your child buy their first home, what are your options?

‘Many young people are struggling to get onto the property ladder, and it is natural to want to help your own children out.’ reflects Chloe Seymour, a Senior Executive in the Residential Property Team with Sills & Betteridge LLP. ‘It all depends on your personal preference and circumstances. However, before committing yourself, there are some important things to consider.’

Here, Chloe looks at some of the issues, and whether it is better to gift or to loan the money.

First, ask yourself if you can afford it.

You may think your children need your help now, but it is important to consider your own long-term financial stability first. As well as taking account of your own plans, for example for retirement, ask yourself how you or your children would cope with unexpected events, such as redundancy, a debilitating illness, divorce or even early death. Talk to your financial adviser and make sure you can really afford to use your capital in this way.

In theory, loaning money rather than gifting it should provide greater security. The debt owed to you is a type of asset and repayments could provide a regular income stream. However, there are other factors to consider. Ask yourself what you would do if your child could not repay you. Hopefully that scenario is unlikely but consider if it is money you would be prepared to lose.

Mortgage lenders will have their own requirements

If your child is taking out a mortgage, you will also need to consider their lender's requirements.

Most lenders will accept a gifted deposit, provided it meets certain conditions. Typically, they will require written confirmation from you that your contribution is an outright gift. They will also require proof of your identity and that the money comes from a legitimate source. Lenders are under a legal duty to carry out these checks under anti-money laundering legislation. Unfortunately, this takes time, and the revelation that the deposit is to be part-funded by a gift can complicate matters. It is important to explain the situation to the lender upfront. Using a solicitor who is experienced in these matters, and who understands the lender’s requirements, will help minimise any delay.

In general, lenders look less favourably on parental loans. Some will not accept a borrower using a loan to part fund their deposit. Others will, but they take the debt into account when calculating how much they will lend. With a loan, your child is likely to have fewer mortgage options. A reputable mortgage broker can give them an idea of the finance and options available.

Document your assistance

You will need to document a gift, although a simple declaration or gifted deposit letter will usually suffice. You will need to show this to your child’s lender if they are taking out a mortgage. You will also need evidence for your own tax records, for example, to show the date of the gift. Your accountant will be able to advise you about the best way to achieve this.

With a loan, you should have a formal written agreement to prevent any future misunderstanding. Setting out the terms agreed between you, the basis for repayment and whether any interest is payable, ensures everyone will be clear on their obligations. This will also help safeguard your money should unforeseen events arise, such as your child becoming bankrupt or getting divorced. Your solicitor can ensure the necessary formalities are completed and advise on additional protection, which could include a legal charge registered against the property, although any lender would also need to agree to this. It is unlikely that your child's solicitor would be able to advise you about this, and you should therefore be prepared to seek your own independent legal advice.

Consider what could happen in the future

As well as considering your own financial position, you should consider your child’s circumstances and how these might change. Many of us would see a gifted deposit as an investment in our child’s future. However, in the event of a relationship breakdown with a partner, their share of equity in the property could be reduced, or even lost, in any divorce settlement. This can be a sensitive topic, but there are ways to mitigate this risk. For example, a declaration of trust can set out the proportions in which any equity will be split, ring-fencing your contribution for the benefit of your child.

A loan can offer greater protection against unforeseen eventualities, such as relationship breakdown or bankruptcy. The debt owed, namely the money advanced, to you can be secured against the property. So, after paying off the mortgage debt, subject to there being sufficient equity in the property, you should get your money back. There is less chance of it inadvertently benefitting a third party. However, on the flip side, the financial benefit to your child is less and it may not be the most tax-efficient option, nor will a loan be acceptable to all lenders, as mentioned above.

Consider death and inheritance tax implications

With a gift, no immediate charge to tax will generally arise. However, the gift will be a potentially exempt transfer (PET) for inheritance tax (IHT) purposes. This means HMRC may treat the value of the gift as part of your estate if you die within seven years. The exact amount of IHT payable by your estate will depend upon several factors, including the total value of your assets and any available reliefs.

Loaning the money, no IHT will generally be payable. However, the value of the loan will be included in your estate when you die and added to your other assets. If these exceed a certain threshold, currently £325,000, then, subject to any reliefs, IHT is likely to be payable. You may also have to pay income tax on any interest you receive.

Your solicitor can discuss the tax implications with you and advise on general estate planning. For example, if you have other children, whom you have not helped financially, and want to treat them all equally, you may want to change the provisions of your will.

There may be other ways to help

A gift or a loan are the most common ways of helping your child to buy their first home, but there are others. For example, if your own income is sufficient, you could consider a joint mortgage with your child to help meet their lender’s affordability criteria, or act as their guarantor. Alternatively, you could purchase the property jointly with them, with a deed of trust specifying how the net sale proceeds will ultimately be split. However, it is important to take independent financial advice beforehand, and not to prejudice your own financial security.

Another possibility, if you have sufficient savings, could be a family offset mortgage or a springboard mortgage. In essence, these allow you to use your savings to reduce the amount of interest your child will pay or to provide temporary security for their borrowings. A mortgage broker should be able to advise you on the availability of these.

‘Your First Home’ and other schemes aimed at first-time buyers

As a first-time buyer, your child could benefit from schemes aimed at helping people get onto the property ladder. Some of these, like the recent ‘Your First Home’ scheme, are Government-backed, others are incentives offered by specific developers.

If your child is eligible for a scheme, it could help them buy a home they otherwise could not afford. The Government has yet to publish detailed guidance for its ‘Your First Home’ scheme, which will open for applications in February 2027. Occasionally, a scheme may preclude certain other types of assistance, such as a gifted deposit. As with any scheme, it will be important to consider all the pros and cons, and the impact on any prospective family arrangements, before making a commitment. In most cases, though, you should still be able to help your child if you want to. So, speak to your solicitor about your options.

How we can help 

So, gift or loan? There are advantages and disadvantages to each and, ultimately, the choice is a personal decision. It is important to take your time and reflect on all the implications. Talking things through with your solicitor early on will clarify these and help you make the right choice. Just as importantly, once you have made your decision, they will ensure the correct formalities are completed, giving you, and your family peace of mind.  

For further information, please contact the Residential Property Team in your local area or call 0800 542 4245. 

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.