Protecting a gifted house deposit: what a declaration of trust does and when you need one
A declaration of trust is a short legal document that records who owns what share of a property, and it is the usual way to protect a gifted deposit when you buy with someone else. Without one, the law normally treats joint owners as equal, so money your parents gave you could be split with your partner if you separate. You should seriously consider one if you are buying with a partner or friend and the gift is larger than their contribution. Check your lender’s rules first, because some lenders restrict how it can be done.
This guide explains what the document does, when it is worth having, and the lender and tax points that people tend to find out too late.
What a declaration of trust does for a gifted deposit
A declaration of trust is a signed legal document between the people buying a property. It records each owner’s share and says how the sale money is divided, so a gifted deposit can go back to the buyer it was given to before the rest is split. It protects your share of the property. It does not give your parents any ownership.
When 2 people buy together and the legal title is in joint names, the starting point is usually that you own the property equally. That sounds fair until 1 of you has paid in far more. The declaration lets you replace that default with something that matches what actually happened.
It is also sometimes called a deed of trust. For a gifted deposit, the two terms mean the same thing in practice.
A gifted deposit letter and a declaration of trust do different jobs
People often assume the gifted deposit letter already protects the money. It does not. The letter is for your lender. The declaration is for you and your co-owner.
Your lender will normally ask whoever gives the money to sign a letter confirming:
Who Is Giving The Money And How They Are Related To You
How Much Is Being Given And Where It Came From
That The Gift Is Not Repayable
That The Donor Takes No Interest In The Property
Many lenders also want the letter dated within 3 months of completion, and they usually ask for clear bankruptcy searches against everyone contributing to the purchase price.
This can look like a contradiction. The letter says your parents cannot ask for the money back, but the declaration says the money comes back to you first. Both are true. The letter deals with your parents’ position. The declaration deals with how you and your co-owner share the proceeds between yourselves.
When you need a declaration of trust
The short answer is that you need one when the money going in is uneven and you want the difference recognised.
Your situation | Declaration of trust likely? | Why |
Buying with a partner and the gift goes to you only | Yes, usually | Without it the gift may be shared 50/50 on a sale |
Buying with a friend or sibling and 1 of you has family help | Yes, usually | Same risk, and less goodwill to rely on if things sour |
Both of you receive gifts of similar size | Optional | An equal split may already match what each of you put in |
Buying alone | Usually no | You own the whole property, so think about your will instead |
Married or in a civil partnership | Take advice | A divorce court has wide powers over how assets are divided |
The money is really a loan | Different documents | A loan must be disclosed to your lender and is not a gift |
A simple example
Take Maya and Tom, who are made up for illustration. They buy a flat for £250,000 with a £50,000 deposit. Maya’s parents give her £40,000 and she adds £10,000 of savings. Tom puts in nothing towards the deposit. They borrow £200,000.
Years later they sell for £300,000 with £190,000 left on the mortgage. That leaves £110,000, ignoring sale costs. Here is how it divides.
Without a declaration of trust | With a declaration of trust | |
How the money is split | 50/50 | First £50,000 to Maya, then the rest shared equally |
Maya receives | £55,000 | £80,000 |
Tom receives | £55,000 | £30,000 |
A real document would usually go further. It can give credit for mortgage payments and improvements, which is often how Tom would recover some ground. The point is that the split is something you decide in advance, rather than something a court or a solicitor has to work out when you are not getting on.
Check your lender before you promise anything
This is the part many guides skip. Not every lender accepts a declaration of trust. Some say a deed of trust or second charge to protect a gifted deposit is not acceptable, while others allow it if the mortgage ranks first and the gift is only recovered once the mortgage is repaid. Your solicitor should check the lender’s instructions before you exchange contracts.
The UK Finance Lenders’ Handbook sets out each lender’s position, and it varies more than most people expect. A few lenders also ask to see the draft declaration well ahead of completion, in at least 1 case at least 10 working days before. Some will not accept a declaration where only 1 person is the legal owner.
Two practical points follow from this. First, tell your conveyancer about the gift as early as you can, ideally before you have an offer accepted. Second, do not let your parents hand over the money on the understanding that a declaration will definitely be accepted.
If your lender refuses, you need to know that while you still have options.
Purchases through a limited company or as a buy to let follow different lender rules, and some lenders do not accept family gifts for them at all. If that is your route, our commercial conveyancing solicitors can look at it before you commit.
What a good declaration should cover
The document can be short, but it should deal with more than the size of the deposit. A well drafted one usually covers:
The Size Of Each Owner’s Contribution To The Deposit
How The Gifted Amount Is Treated When You Sell
How Mortgage Payments And Improvements Are Counted
What Happens If 1 Owner Wants To Buy The Other Out
How Disagreements Will Be Resolved
Your parents are not usually named as people with a share. Lenders generally need the donor to confirm they take no interest in the property, so the declaration records your share rather than giving them one.
Most declarations also work best when you own as tenants in common rather than joint tenants, because that allows unequal shares. If you hold the property that way, your share passes under your will, not automatically to your co-owner. A good time to speak to wills and probate solicitors about that is when you buy, not years later.
What can still go wrong
A declaration of trust is useful, but it is not a guarantee. These are the weak spots worth knowing about.
Marriage. If you later marry, the declaration still exists, but a divorce court has wide powers over how your assets are divided. The declaration is strong evidence of what you intended. It is not a promise the court must follow. A pre or post nuptial agreement can add weight.
A gift that is secretly a loan. If your parents expect the money back, it is not a gift. Signing a gifted deposit letter that you know is untrue can amount to mortgage fraud. If the money is a loan, say so, and take advice on how your lender treats it.
Checks on the donor. Your solicitor will usually ask your parents for ID and bank statements to show where the money came from. Lenders also expect clear bankruptcy searches against contributors. It helps to understand what property searches involve so none of this comes as a surprise.
Inheritance tax. A gift to a child for a deposit is not taxed when it is made. Under the GOV.UK rules on gifts, no inheritance tax is due on a gift if the donor lives for 7 years after giving it. If they die sooner, tax may apply depending on the size of the gift and the total value of gifts they made, and each person has an annual exemption of £3,000. Your parents should keep a record of what they gave and when.
How it works with your conveyancer
You do not have to arrange any of this yourself. In practice the process looks like this.
You tell your solicitor about the gift when you instruct them, and your parents provide ID and evidence of the source of funds. Your solicitor checks what your lender will accept, drafts the declaration, and sends it to the lender if that is required. Everyone signs before you exchange contracts, and the signed document is kept safely with your papers.
You can sign a declaration after you complete, but every owner has to agree to it, and agreement is hardest to get when a relationship is under strain. It is far easier to do it when you are all still on good terms. If you want help from conveyancing solicitors in Sheffield who can explain the options and check your lender’s rules, you can talk to our conveyancing team before you commit to a purchase.
Frequently asked questions
Can parents protect money they give for a house deposit?
Yes, but not by keeping a claim over the property. The usual route is a declaration of trust between the buyers that records the buyer’s share, including the gifted amount, so it comes back to that buyer first on a sale.
Do you have to tell your lender about a gifted deposit?
Yes. You must declare it to your lender and to your solicitor. Lenders need to be sure the money is a gift and not a loan, and your solicitor needs to carry out anti money laundering checks on where it came from.
Can parents ask for a gifted deposit back?
Not if it is a true gift. Once given, the money belongs to the person who received it. If your parents expect repayment, it is a loan and needs to be handled and disclosed that way.
Can you add a declaration of trust after buying?
Yes, if all the owners agree, and your lender may need to be told. It is much easier to put one in place before exchange.
Is there tax on a gifted deposit?
The person receiving the gift does not normally pay tax on it. The donor may face an inheritance tax issue only if they die within 7 years and the value of their gifts is high enough.
Getting it right before you exchange
A gifted deposit is generous, and a declaration of trust makes sure it does what your family intended. The sensible order is to speak to your solicitor early, check what your lender accepts, and get the declaration signed before you exchange contracts.
Athi Law is a family run firm with offices in Sheffield, Dronfield and West Bromwich. If you are buying with help from family and want the money protected properly, contact the team and tell us about the gift at the start.
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