Deed of trust – flexible written agreement

Circumstances change.

Gifted deposit

deed of trust

What is a gifted deposit? Below is a typical but fictional scenario.

Background

Jack wants to buy a property for £225,000.

When Jack’s mortgage application is approved, he still needs a 20% deposit. Jack has a good job and can afford to pay a mortgage but he can’t save the deposit because he is paying a high rent.

Jack’s girlfriend Melissa is buying the property with Jack and she has £2,000 in savings. She is going to put this money towards the purchase costs and survey fees.

Jack’s dad Robert is willing to release some money from his pension pot to lend to Jack. Jack agrees to pay it back over time with the money he saves paying a lower mortgage rather than rent.

Jack and Robert are surprised when the mortgage lender makes it a condition of the mortgage that there is a gifted deposit. In other words it must not come from other borrowed funds. Robert is asked to sign a statement/letter confirming that the deposit will be a gift not a loan to Jack.

Possible options

In order to satisfy the requirements of the mortgage lender, Robert will need to gift Jack the deposit and sign a statement to confirm this is a gifted deposit.

Before completion of the purchase either:

A deed of trust can be prepared with the effect that Jack has a greater share in the property than Melissa. In this way, Jack will have the option of gifting the money back to his father if the property is sold (providing it does not sell for less than the original purchase price). The original handover of money will be an outright gift to Jack however with no certainty that Robert will be reimbursed.

or:

A deed of trust can be prepared with the effect that if there is a sale in the future, Robert will receive a lump sum after the mortgage and other costs of sale are paid, but before Jack and Melissa receive their respective shares of the sale proceeds. This can be a fixed amount or an amount with interest. Care must be taken to ensure that the terms of the mortgage are not breached when drafting this type of deed of trust. Properly drafted, Robert will receive his money back upon a sale.

The mortgage lender’s position

The mortgage lender has no interest in whether Jack chooses to give his father back the gifted deposit at some point in the future, if he is in a financial position to do so.

The focus for the lender is to ensure that

the borrower can afford the mortgage; and

that there is nothing in the deed of trust that could conflict with the mortgage contract.

The deed of trust must be carefully drafted so that the terms have no impact on the legal ownership or the borrower’s ability to comply with the mortgage terms and conditions and will not breach the mortgage contract.

Tax and stamp duty implications

Depending on the overall value of Robert’s estate, inheritance tax may be payable if Robert dies within 7 years of gifting the deposit to Jack. For more information on how inheritance tax works, look here.

Robert may also pay income tax on the lump sum as he releases it from his pension, depending on whether he has already taken any out before. You can find out more about taxation of pensions here.

Stamp duty might be due, depending on whether either Jack or Melissa have owned any property before. Stamp duty rates vary. You can find out more here.

The transactions are not likely to give rise to capital gains tax as private residence relief applies and there is a trust. You can read more about this here.

Get in touch

If you would like to find out more about whether a deed of trust is right for you

Contact me about a deed of trust

Contact me about a deed of trust

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Property details

Is the property in England or Wales?

It is only possible to create a deed of trust when all of the owners agree to it.

The areas you will need to agree on are:

  1. How much the property is worth;
  2. How much is currently outstanding on any mortgage (if you are in the process of buying the property this will be the amount that is being drawn down on completion day plus any penalties for early repayment etc.);
  3. How much each owner/person involved with the agreement, has paid towards the deposit and other purchase costs – stamp duty, legal fees and so on;
  4. Who is going to live in the property;
  5. Who is initially going to pay the mortgage and the bills (or in what shares);
  6. How long you want the agreement to last.
Do all the owners/people involved with this agreement, agree on the points listed above?
Do you consent to being contacted by email to arrange a free consultation?

Nicola is happy to announce that she will be joining Taylor Rose MW on 12th July 2022 as a consultant solicitor