When is a gift not a gift?
I mean this in relation to buying a house and being given cash towards a conveyancing transaction. You will no doubt have seen the piece in the news recently about Ryan Giggs moving into the house he bought for his mother.
More and more we are seeing gifts in conveyancing transactions, although usually they are from the bank of mum and dad and not the other way around! So what’s the difference between a gift and a loan and when is a gift not a gift?
The most common gifts seen in conveyancing transactions are gifted deposits -these are monies given to buyers and applied towards the purchase price and are usually from family members. However, gifts must be disclosed to both solicitors and mortgage lenders alike.
Gift Or Loans?
In order to comply with requirements solicitors are under an obligation to disclose the existence of gifts to the mortgage lender. The persons giving the gifts (let’s call them the giftors) will need to confirm in writing that the monies are a gift and not a loan and therefore the giftors will not have any interest in the property. The mortgage lender will rely on this declaration. Most solicitors will also require proof of identification for the giftors and evidence of the source of funds.
The majority if not all lenders will be reluctant to lend if the monies are not a gift and therefore will need to be repaid. This is usually be because the lender does not want any further parties to have an interest in the property in the event that the lender repossess’ the same.
So when gifting monies, giftors should appreciate the fact that they will have no control over the monies given and cannot claim it back! In most situations there is no problem with this but consider the following example:
Case Study Example
Tim and Sarah have decided to buy a property for £300,000. They are obtaining a mortgage for £200,000 contributing £60,000 themselves from their joint savings. Sarah’s dad, Jeff, is gifting £40,000. But who is he gifting the monies to – Tim and Sarah or just Sarah? If to Tim and Sarah then there is no problem.
If Jeff wishes the money to benefit his daughter only how can the gift be given for the benefit of Sarah if the house is being bought jointly between Tim and Sarah – Jeff will have no control over the gift. Well, one way would be for Tim and Sarah to enter into a deed of trust, stating that in the event the property is sold the first £40,000 of the equity could be applied for the sole benefit of Sarah with the remainder of the equity being split between Tim and Sarah. This means that whilst Jeff’s gift is a gift, the gift is going to the benefit of his daughter both now and in the future. The gift that keeps on gifting!