With interest rates being pushed upwards while house prices remain high, it’s no wonder that many buyers are grateful to receive gifts from financially secure relatives to help them up that housing ladder.
But when those same buyers approach a lender for a mortgage or look to register their gifts, they are often confronted with a host of legal implications. Jennie Curtis discusses what a lender should look out for, and what a buyer can expect, when a gift is involved in the purchase of property.
Gift of deposit monies
A common scenario is where a relative (usually a parent) makes a gift of money to help someone buy a house. The person making the gift is called the “Donor” and the person receiving the gift is the “Recipient”. This does not necessarily have to be a gift to an individual, and can be a gift involving companies. The key point is that a gift comes with ‘no strings attached’.
A lender will typically require that the Donor provide confirmation in writing, by way of Deed of Gift or Gift Deposit Declaration, confirming that the money is an unconditional gift that will not be repaid. The intention here is to demonstrate that this is not a loan, such that the recipient will be taking on debt for which the ‘lender’ could later demand repayment. This is prudent, even where a mortgage is not being sought.
Is the donor solvent?
A lender will may also require a declaration of solvency from the Donor. This is a statement that the Donor has sufficient funds to make the gift – they are not short of funds, such that they will be put into bankruptcy as a result of making the gift (or are not bankrupt already). This is an important point for a lender, as a gift made to a ‘connected party’ (e.g. husband, wife, civil partner, child, grandchild, parent etc) in order to avoid creditors can be set aside by a trustee in bankruptcy.
This would basically be a swindle on creditors – X is overrun with debt and about to go bankrupt (or insolvent if a company), so X ‘gifts’ its house to ‘Y’ so X’s creditors are unable to bring a financial claim against what is now Y’s asset. The law protects X’s creditors and there are powers for the trustee in bankruptcy to reverse (or ‘set-aside’) X’s gift. If Y took out a mortgage on the house, then that too would be set-aside, and this would not be satisfactory for the lender.
In addition, it should be independently checked that the donor is not bankrupt or insolvent by carrying out solvency searches and checking the authenticity of the donor’s signature.
Does the donor have capacity?
If there are any doubts as to the mental capacity of the Donor, a capacity assessment should be undertaken.
Giving a partner a share of the property
Another common scenario is where an individual owning property is moved by affection for their current partner and gifts them a share of their property. For married couples in particular, there are tax benefits in transferring property into joint ownership.
To update the register from sole ownership to joint ownership at the Land Registry, there will have to be a signed Transfer. A verbal gift is not sufficient to transfer ownership in land. Typically for gifts, that transfer will be not for monetary value or for the value of any mortgage being redeemed.
Thought should be given to what the size of the share will be and how the property will be held. If the share is to be 50/50, the new owners may choose to become joint tenants. This means that if one of the owners dies, the other automatically gets the whole property. Basically, the last person standing takes all. The advantage is that the property does not need to be left to the other person by a Will.
If the share is 50/50, but the owners want to leave their share to someone else in their Will, or perhaps the shares are to be unequal (e.g. 20/80), then the property can be held as tenants in common.
The Land Registry requires the new owners to state on the actual transfer how they will hold the property. This point is commonly overlooked when drafting or signing the transfer and can delay registration of property.
As with a gift of money, a lender will usually require written confirmation that this is an unconditional gift of land and that the Donor is solvent.
Gifts of the whole of the property
The situation is not dissimilar for a gift of whole of the Property, for example, a gift from a parent of their house to a child. The parent will again need to attest to their solvency and confirm in writing that is it is a gift.
It should be noted that, if a person ‘gifts’ a property to someone else and then continues to live on at the property, this could be classed as a ‘reservation of benefit’ which may negate any tax benefits that would arisen from the gift. If this scenario applies, there are further points to be considered and specialist advice should be sought.
Gifts of property can cost the recipient or donor money!
While a gift of land is ‘free’ for the recipient, it does have value. The recipient will need to consider what the value of that gift is. This is calculated by reference to the market value of the Property on the date of the transfer.
Depending on the value of the gift, a tax liability may arise. Common taxes are:-
- Inheritance tax – for gifted properties with a value over the nil rate band (currently £325,000) and where the donor has died within 7 years of the gift being made, then the recipient could be required to pay IHT. Different rules apply for gifts to spouses, civil partners and charities.
- Capital gains tax – if the property is not the donor’s main home and it has increased in value above the capital gains tax threshold, then the donor could incur a liability. Deductions can be made for the cost of any major works.
- Stamp duty land tax – if there is an existing mortgage on the property which is being redeemed as part of the transfer, then SDLT could be payable depending on the size of the mortgage.
Not to mention, the recipient will also have legal fees and pay registration fees to the Land Registry, when registering the transfer.
The key point is for the parties to consider the nature of the gift at the outset and make plans accordingly. When all that’s dealt with, the Recipients can fully enjoy their gift.
This article is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this article may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.