If you are receiving part of your mortgage deposit as a gift, the donor may be asked by the lender to provide a letter confirming that the funds are a gift (not a loan). A gift letter needs to be from the donor, addressed to the lender, and must include specific information. An example of a suitable mortgage deposit gift letter is below.
Mortgage Deposit Gift Letter Notes
Addressing – The gift letter must show donor’s full name(s) and address (both donors if a couple) and should be addressed to the lender but forwarded to your mortgage broker (do not send direct to the lender)
Include purchaser’s full names and current address in the letter.
Content – You must include gift size, the property address, and the donor’s relationship to the purchasers. If any sums have already been supplied to third parties by the donor(s), this should be noted as in our example.
Our sample content as shown is sufficient for the majority of mortgage lenders.
Date – please date your letter
Gifts from more than one source – each donor should produce their own gift letter (unless they are a couple when a joint letter is sufficient).
Identification – Lenders do not usually ask for identification details for the donor(s) (and example of where they may is when the donor lives overseas).
Original copies – please post an original signed copy of the gift letter to your mortgage broker, fax or email a copy initially to reduce delays.
Permission to hold detail - Where a donor’s identification is requested, the lender will ask for permission to keep that identification on file and permission should be given in the content of the gift letter.
Proving funds – Proof of donor’s funds may be requested if the donor lives overseas. Your broker will inform you if proof of donor’s funds has been requested.
Residing in the property – The Lender will not normally expect a donor to reside in the purchase property and the donor should indicate in their letter that they do not intend to do so. If the intention is that your donor will reside in the property, you should speak to your mortgage broker in the first instance.
Signature – all donors must sign the gift letter
Potential complications with mortgage gifted deposits that you should be aware of
1. Inheritance tax
Should your donor die within seven years of gifting your funds there may be an inheritance tax bill payable by you on the value of the gifted deposit. Since inheritance tax is currently payable at 40% this could be a considerable problem.
Whether any tax is due will depend on a number of factors, the most important of which will be the value of the deceased’s estate. The current nil rate band is £325,000 which means that any individual’s estate which values in excess of £325,000 could be liable to 40% tax on the remainder including any gifts in the seven years before death (subect to various rules and allowances).
A simple way to protect yourself against this is for the donor’s life to be insured for the value of the potential IHT bill for a minimum seven year period. Ask your mortgage broker for more information about this.
2. Bankruptcy of your donor
If your donor were to be made bankrupt after your gift has been made, the Insolvancy Act 1986 allows for the trustees of the bankruptcy to ‘set aside’ the gift (in other words they could seek to reclaim the funds). Although the Act does not refer to gifts as such, the trustees could consider that the bankrupt was attempting to protect assets from the estate. Although this is an extremely unlikely problem to have, some lenders consider it and as a result sometimes request additional paperwork to be completed by the legal team.