What is a gifted equity mortgage and how does it work?

Full answer

A gifted equity (or gifted deposit via equity) mortgage arises when a property is sold to a family member for less than its true open-market value, and the difference between the sale price and the market value is treated by the mortgage lender as if it were a cash deposit, even though no cash actually changes hands for that portion. **How it typically works** A parent owns a property worth £300,000 outright or with a small remaining mortgage, and sells it to their adult child for £240,000. The £60,000 difference (20% of market value) is the "gifted equity" and is treated by most lenders in the same way as a 20% cash deposit, meaning the child can apply for an 80% loan-to-value mortgage of £240,000 without needing to find a cash deposit themselves. **Lender requirements** Most mainstream lenders will accept gifted equity, but typically require: an independent valuation confirming the true market value, a solicitor's letter confirming the equity gift is genuinely a gift (not a loan that must be repaid), and confirmation that the seller will have no ongoing interest or right to reside in or reclaim any part of the property once sold. Some lenders restrict gifted equity to close family members (parents, grandparents, siblings) only. **Inheritance Tax implications for the seller** From the seller's (usually the parent's) perspective, the £60,000 of equity given away is treated as a gift for Inheritance Tax purposes -- specifically a Potentially Exempt Transfer (PET). If the seller survives seven years from the date of the sale, the gift falls outside their estate entirely; if they die within seven years, the value can be brought back into their estate for IHT calculation purposes (with taper relief reducing the tax due if death occurs between three and seven years after the gift), subject to the nil-rate band (£325,000) and residence nil-rate band (£175,000) as usual. **Capital Gains Tax implications for the seller** If the property being sold is not the seller's only or main home (for example, they are selling a second property or a former buy-to-let to a relative below market value), HMRC treats the disposal as taking place at full market value for Capital Gains Tax purposes, regardless of the discounted price actually paid. This means CGT can still be due on the full uplift from the seller's original purchase price to the true market value, even though they only received £240,000 in cash. If the property being sold is the seller's only or main residence, Private Residence Relief would usually still apply in the normal way. **Stamp Duty Land Tax for the buyer** SDLT is charged on the actual consideration paid (the £240,000 price), not the full market value, so the buyer's SDLT bill is calculated on the lower figure -- a further practical benefit of a gifted equity structure, provided the transaction is structured and disclosed correctly. **Worked overall example** A parent sells a £300,000 second property to their child for £240,000 (a £60,000 gifted equity deposit). The child gets an 80% mortgage with no cash deposit needed. SDLT is based on £240,000, not £300,000. The parent may have a CGT bill based on the property's full market value uplift since they bought it (not the discounted price), and the £60,000 gift starts a seven-year IHT clock. Because of these interacting tax consequences, both parties should take independent legal and tax advice before proceeding.

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