Giving money to family and friends is common in the UK, especially for birthdays, weddings, house deposits, or financial support. But many people worry about whether cash gifts are taxable and if they must tell HMRC. The rules can seem confusing, especially when it comes to inheritance tax, annual allowances, and what counts as a “gift”.
This full guide explains how cash gifts work, when HMRC needs to know, and how to stay compliant without stress. The information applies to UK residents and small business owners who want simple, reliable answers.
Understanding Cash Gifts and UK Tax Rules
Cash gifts are treated differently from income, and in most cases, the person receiving the gift does not pay tax. However, some gifts may create inheritance tax implications if the giver dies within seven years. This section explains the basics.
What Is a Cash Gift?
A cash gift is money given to someone without expecting anything in return. It can be:
- A bank transfer
- Physical cash
- Gift vouchers
- Money used to pay someone’s bills
- Contributions toward big costs, such as a deposit
As long as the giver does not receive something of equal value back, it is normally classed as a gift.
Is There Tax on Cash Gifts in the UK?
In the UK, cash gifts are not subject to income tax for the person receiving them. HMRC does not usually treat gifted money as earnings.
However, gifts can be counted as part of the giver’s estate for Inheritance Tax (IHT). This means a tax charge may apply later if certain limits are exceeded or the giver passes away within seven years.
Most people do not pay tax on gifts because of the available exemptions and allowances.
Tax Implications of Cash Gifts
While there is no income tax on gifts:
- The giver may face inheritance tax implications
- Gifts may reduce the giver’s estate for IHT purposes
- Some gifts may count towards annual allowances
- Large gifts should be recorded for future reference
The tax treatment depends on the size of the gift, the giver’s estate value, and whether it fits within HMRC’s exemptions.
Example of Tax on Cash Gifts
Example:
Your aunt gives you £30,000 to help with a house deposit.
- You do not pay income tax.
- If your aunt dies within seven years and her estate exceeds the £325,000 threshold, the gift may reduce her tax-free estate allowance.
If she lives longer than seven years, the gift becomes fully tax-free for IHT.
Can You Give Cash Gifts Without Paying Tax?
Yes. Many gifts can be given completely tax-free using HMRC exemptions, such as:
- The £3,000 annual gift allowance
- Wedding gift exemptions
- Small gift allowances
- Regular payments from surplus income
These rules allow most people to give money to their family without worrying about tax.
Example: Tax-Free Gift Scenarios
- A parent gives a child £3,000 in one tax year
- A grandparent gives £250 to each grandchild for birthdays
- A friend receives £5,000 as a wedding gift
- A family member gives regular monthly payments from surplus income
None of these create a tax charge as long as HMRC’s exemption criteria are met.
Do I Need to Declare Cash Gifts to HMRC in the UK?
Most cash gifts do not need to be declared. HMRC is not usually interested unless the gift may affect inheritance tax or is given as part of someone’s regular income.
However, there are situations where declaration becomes necessary. This section explains when you must inform HMRC and how the rules work.
When You Must Declare Cash Gifts
You must declare a gift to HMRC if any of the following apply:
- The giver dies within seven years and the gift was more than the annual allowances
- You are completing probate and listing gifts made in the last seven years
- The gift is part of a regular income pattern that needs evidence
- HMRC requests documentation
Usually, the executor, not the recipient, declares the gift.
Do You Pay Income Tax on Cash Gifts?
No. Cash gifts are not taxable income, so you do not pay income tax on them.
Income tax only applies if:
- The money was given in exchange for work or services
- The payment is considered earnings
Normal personal gifts do not fall under this category.
Keeping a Record of Gifts
It is important for the giver to keep a simple record of:
- The date of the gift
- The amount
- The recipient
- Whether it is part of the annual allowance
- Whether it is a regular payment from income
This helps the family avoid confusion later if inheritance tax becomes relevant.
What Happens If You Don’t Declare a Gift to HMRC?
If the gift should have been declared during probate and it was not:
- HMRC may charge penalties
- Extra inheritance tax may be due
- The executor may face delays in settling the estate
For the recipient, there is usually no penalty unless they received the gift as disguised income or failed to provide records when asked.
How to Correctly Report Gifts to HMRC
Gifts are reported through:
- The IHT400 form during probate
- Supporting schedules (IHT403 and others)
- Declaring gifts made in the seven years before the death of the giver
Regular gifts from income may need documentation to show they meet HMRC rules.
Getting Valid Gift Declarations
A gift letter (sometimes needed by mortgage lenders) should include:
- Name of the giver
- Name of the recipient
- Amount given
- Confirmation that the gift does not need to be repaid
- Confirmation that the giver is financially stable
This is not a tax requirement but is often needed for bank and mortgage checks.
UK Tax-Free Gift Allowances
HMRC provides several tax-free allowances that allow people to give money without inheritance tax concerns. These rules make gifting simple when used correctly.
How Much Money Can You Gift Tax-Free Each Year?
The annual exemption allows you to give up to £3,000 per tax year without affecting inheritance tax.
You can:
- Give it to one person
- Split it between several people
- Carry forward unused allowance for one year
This means you can gift up to £6,000 if you didn’t use last year’s allowance.
These HMRC allowances are separate from the standarkod UK tax threshold, which affects how much income you can earn before paying tax.
Cash Gifts Over the Annual Allowance
If you give more than £3,000 in a year:
- The excess counts as a Potentially Exempt Transfer (PET)
- It only becomes taxable if the giver dies within seven years
- Taper relief may reduce the tax after year three
Most gifts remain tax-free because the giver lives longer than seven years.
Substantial Lifetime Gifts and Their Implications
Large gifts such as:
- House deposits
- Large savings transfers
- Paying off debts
may require detailed records.
The gift remains tax-free unless the giver dies within seven years and their estate exceeds the IHT threshold.
The Seven-Year Rule Explained
If the giver survives seven years after making the gift, it becomes:
✔ Completely free of inheritance tax
✔ No longer part of the estate
✔ No longer subject to taper relief
If the giver dies within seven years, inheritance tax may apply at:
- 40 percent in the first three years
- Reduced rates with taper relief from years three to seven
Gifting from Regular Income
HMRC allows people to give regular payments from their surplus income, completely tax-free.
Rules for Giving Regular Sums from Your Income
To qualify:
- The payments must come from income, not savings
- The giver must maintain their usual lifestyle
- The payments must be regular
- Records must be kept
Examples include monthly help with rent or school fees.
Keeping Proper Records
HMRC expects clear evidence showing:
- Income level
- Regular payments made
- Proof the payments did not reduce the giver’s standard of living
A simple spreadsheet or bank statements are usually enough.
Gifting to Children and Family Members
Gifting money to children or other family members is common in the UK. Many parents and grandparents give money to help with school fees, savings, birthdays, or long term support. HMRC does not stop you from giving money to your family, but there are rules you should understand, especially when it comes to inheritance tax and parental settlement rules.
The key point is that most small gifts are usually fine and will not cause a tax problem. Issues normally come up only with large sums or regular payments that count as income. Understanding how each rule works will help you give money safely without creating a tax issue later.
How Much Can You Gift Your Child or Grandchild?
You can gift as much as you like to a child or grandchild, but only certain amounts are fully tax free under the annual exemptions. For example, you can give up to your yearly allowance without it affecting your estate for inheritance tax. You also have a small additional allowance for wedding gifts, which many families use when helping children marry or start a new home.
Grandparents can also gift freely, but large gifts may count toward the estate if the giver passes away within seven years. For most families giving normal amounts for birthdays, Christmas, or school needs, there is no tax to worry about.
How Much Can a Parent Gift a Child Tax-Free?
Parents can gift up to the annual exemption amount without any inheritance tax consequences. You can also give more than this if it comes from regular income rather than savings, as long as the payments do not affect your standard of living. HMRC calls this gifting from normal expenditure. For many parents helping with private school fees or university costs, this rule is helpful.
If a parent gives more than the allowance, the amount may still be tax free, but it might become part of the estate until seven years pass. Overall, most regular family gifts remain simple and tax free.
Gifts to Children Under 18
When gifting to children under 18, the main rule to be aware of is the parental settlement rule. This rule applies when a parent gives money to a child, and that money earns income, such as interest or dividends. If the income goes over £100 a year, HMRC may treat it as the parent’s income instead of the child’s.
This rule is designed to stop parents from moving large sums into a child’s account to use their tax-free allowances. However, gifts from grandparents or other relatives do not fall under this rule, so they are usually simpler.
Savings accounts, Junior ISAs, and trust funds are common ways to give money to younger children. As long as the accounts are set up correctly and you follow the rules, the process remains straightforward.
Exceptions to the Parental Settlement Rules
There are a few situations where the parental settlement rules do not apply. For example, if the funds come from a grandparent or another relative, the rules do not restrict the income limit. The rule also does not apply to Child Trust Funds or Junior ISAs, as these have their own tax rules.
Gifts given through a trust may also sit outside the settlement rules if the trust is structured correctly. Families often use these methods to save for a child over time without causing any unexpected tax issues.
Ways to Give Money to Children
There are several safe and simple ways to give money to a child. Many families use savings accounts to build long term funds for education or future goals. Junior ISAs are a popular choice because all growth inside the account is tax free and the money becomes the child’s at age 18.
You can also pay directly for a child’s expenses, such as school fees or club costs, which is often simpler than transferring cash. Larger gifts can be held in a bare trust or discretionary trust if you want to maintain some control over how the money is used.
The method you choose depends on how much control you want, the size of the gift, and the age of the child. Each option has different rules, but they all allow you to support your child or grandchild in a tax efficient way.
Overseas and Cross-Border Cash Gifts
Many UK residents receive money from relatives who live abroad. This is very common in families where members are based in different countries. Cash gifts received from overseas are usually allowed, but HMRC may ask where the money came from. This is because of anti money laundering checks, not because the gift is taxed. As long as you can show the funds are a genuine gift, the process is normally simple.
Large overseas transfers can raise questions, especially if the amount is unusual compared with your normal bank activity. Keeping proof of the sender, their relationship to you, and the reason for the gift can help avoid delays.
Rules for Cash Gifts Received from Abroad
Cash gifts sent into the UK from another country are not automatically taxable. You do not pay income tax just because the money came from overseas. However, HMRC may check that the money is not income from work or a hidden payment.
Your bank may also ask for documents, such as:
- A written confirmation from the person sending the money
- Their ID or proof of address
- Evidence that the funds came from savings or legitimate income
These checks are routine and are meant to prevent fraud. As long as the gift is genuine, it will usually pass without issue.
Example: Overseas Gift Scenario
Imagine your parent living abroad sends you £20,000 to help with a house deposit. You will not pay UK income tax on this gift. However, your bank may ask for proof of the source of funds. A simple letter confirming it is a gift, along with a copy of their ID, is usually enough.
If the giver passes away within seven years and they were a UK resident for tax purposes, the gift may count toward inheritance tax. If they were a non UK resident with no UK assets, it normally will not.
Tax Considerations for International Family Gifts
International gifts mainly become a tax concern when:
- The giver has UK assets
- The giver was UK domiciled
- The gift is very large
- The money is actually payment for work or services
If none of these apply, most overseas gifts remain tax free. It is still wise to keep clear records, including bank statements and gift letters, in case HMRC ever asks.
Cash Gifts and Inheritance Tax (IHT)
Cash gifts often become most relevant when considering inheritance tax. IHT applies to a person’s estate after they die. Gifts made during life can reduce the estate, but they may still be counted if they exceed allowances or are given too close to the date of death.
Most everyday gifts do not cause any IHT problems, but large lifetime gifts may. Understanding how the rules work can help families plan ahead.
Early Inheritance Money
Many parents choose to give money during their lifetime so their children benefit earlier. HMRC sees this as a potentially exempt transfer. If you live for seven years after giving the gift, it becomes completely tax free.
Early inheritance money helps families now, rather than waiting until an estate is settled. It is often used for house deposits, education, or setting up a business.
Who Pays Inheritance Tax on Gifts?
If a gift becomes subject to inheritance tax, the person who receives the gift may be responsible for paying the tax. This happens mainly when a donor dies within seven years and the estate does not have enough funds to cover the tax owed.
To avoid confusion, families often:
- Keep a list of significant gifts
- Track the dates and values
- Make sure executors know about any large transfers
Clear records make estate administration much easier.
Impact of Lifetime Gifts on IHT
Lifetime gifts reduce the value of a person’s estate. This means they can help reduce the inheritance tax bill. However, gifts above the annual allowance may still be counted for up to seven years.
Taper relief may also apply if the donor dies between three and seven years after giving the gift. This reduces the tax rate depending on the time passed. Smaller gifts are usually ignored completely.
Trust Fund Issues and Gift Planning
Some families use trusts to pass money to children in a controlled way. Trusts have strict tax rules and sometimes trigger immediate charges if the gift is large. They can be useful for long term planning, but professional advice is usually needed.
Trusts are often used when:
- The donor wants to control when the child receives the money
- The gift is substantial
- Protection is needed for vulnerable family members
If set up correctly, trusts allow money to be passed on in a safe and tax efficient manner.
Cash Gifts for Property Purchases
Cash gifts are very common when buying a property in the UK. Many first time buyers get support from parents, grandparents, or relatives. Mortgage lenders normally require a clear gift declaration to prove the money is not a loan.
HMRC may also check where large sums came from, but this is usually just for money laundering checks rather than tax.
What Property Buyers Must Declare to HMRC
When buying a home, the solicitor must report any large payments that could be suspicious. This does not mean the gift is taxable. It is simply part of the legal checks they must do.
Buyers may be asked for:
- A gift letter
- ID for the person giving the money
- Proof of their funds and how they were obtained
These steps help confirm the money is clean and the gift is genuine.
Getting Valid Gift Declarations
A proper gift letter is required by mortgage lenders. It usually includes:
- The giver’s name and address
- The receiver’s name
- Confirmation that the money is a gift, not a loan
- A statement that the giver will not expect repayment
- Proof of identity
This letter protects both the buyer and the lender by making the terms clear.
Common Cash Gift Amounts for First-Time Buyers
Gift amounts vary widely, but it is common to see:
- £5,000 to £15,000 for deposit support
- £20,000 to £40,000 from parents for first homes
- Smaller gifts for legal fees or moving costs
All these amounts are allowed as long as the money is declared correctly.
Alternative Ways to Fund a Home Purchase
Not all families use cash gifts. Other options include:
- Loan agreements
- Joint mortgages
- Lifetime ISAs
- Using equity from a family home
Using the right method depends on the buyer’s income, deposit size, and long term plans.
Gifts vs Loans: Tax Implications
Gifts and loans are treated differently by HMRC and mortgage lenders. It is important to be clear in writing whether the money is a gift or a loan. Confusion can cause tax problems later or delay a property purchase.
Tax Rules for Cash Gifts
Cash gifts are usually tax free for the receiver. They may affect inheritance tax later but do not trigger income tax. HMRC only becomes concerned if the gift is very large or if it looks like payment for work.
Tax Rules for Cash Loans
Loans are not taxed, but they must be structured properly. If a loan is interest free between family members, it is still allowed. However, HMRC may check if:
- The loan is being disguised as a gift
- Interest is being avoided for tax reasons
Clear documents protect both sides and prevent misunderstandings.
Documentation Requirements
Good documents help avoid tax issues. At minimum, keep:
- A signed gift letter or loan agreement
- Bank transfer evidence
- Proof of identity for the giver
For loans, include repayment terms and interest details if applicable.
Reporting and Compliance
Most gifts do not need to be reported to HMRC unless they cause inheritance tax concerns or form part of your income. However, banks, solicitors, and estate executors must follow strict rules.
How to Correctly Report Gifts to HMRC
You may need to report gifts if:
- They form part of an inheritance tax return
- They are regular gifts from income
- The gift creates income for the child above the parental limit
Reporting can be done through the IHT forms available on the government website, or through the Self Assessment system if required.
If you want help reporting a gift or planning ahead for inheritance tax, working with specialist accountants in London can ensure full compliance with HMRC rules.
Security, Fraud Prevention, and Money Laundering Checks
Banks and solicitors must check the source of funds for large gifts. This includes:
- Verifying identity
- Understanding where the money came from
- Checking for unusual activity
These checks are standard and protect against illegal transfers.
What Gift Givers Should Consider
If you plan to give a large gift, consider:
- How it may affect your estate
- Whether you need a written declaration
- If you can afford the gift without affecting your finances
- Keeping records for your executors
Careful planning makes gifting simple and stress free.
Is It Better to Gift or Inherit?
Families often wonder whether it is better to give money now or leave it in a will. The best option depends on your goals, health, and financial situation.
Pros and Cons of Lifetime Gifting
Advantages:
- Children benefit sooner
- May reduce inheritance tax
- Helps with major costs like property or education
Disadvantages:
- You lose control of the money
- The gift may create IHT issues if you die within seven years
Many families use a mix of gifting and inheritance for balance.
Gifting vs Inheriting Property
Giving property during life can trigger tax charges, including capital gains tax. Leaving property in a will is often simpler unless you use trusts. When deciding, consider:
- The tax position of the property
- Stamp duty for the receiver
- Potential capital gains tax for the giver
Getting advice is wise when the asset is large.
FAQs
Do You Pay Income Tax on Cash Gifts?
No, you do not pay income tax on cash gifts in the UK. HMRC does not treat a genuine gift as income. The only time tax may apply is if the payment is actually for work or a service, even if someone calls it a gift.
For normal family gifts, there is no income tax to pay.
Can You Give Cash Gifts Without Paying Tax?
Yes, you can give cash gifts without paying tax, as long as they fall within HMRC’s gift allowances or the person giving the gift lives for seven years after making it. Small, regular, or everyday gifts are usually tax free. Larger gifts may be checked later for inheritance tax if the giver passes away within seven years, but most people never face a tax charge on cash gifts.
What Are Tax-Free Gift Examples?
Here are simple examples of tax free gifting situations:
- A parent gives their child £2,000 for university costs
- You receive £10,000 from a relative abroad to help with a deposit
- Grandparents give £500 each birthday
- A parent gives £3,000 using the annual gift allowance
- Regular gifts made from spare monthly income
In all these cases, there is no income tax to pay, and most will not create any inheritance tax issues.
What Are the HMRC Rules for Large Transfers?
Large transfers are allowed, but HMRC and banks may ask for proof of where the money came from. This is part of anti-fraud and money laundering checks. HMRC does not automatically tax large gifts, but you should keep records because they may count towards inheritance tax if the giver dies within seven years.
Banks may request:
- A gift letter
- Proof of identity
- Evidence of the source of funds
These checks are normal and help confirm the transfer is genuine.
Are There Limits on Bank Transfers as Gifts?
There is no legal limit on how much money you can send as a gift through a UK bank. You can transfer any amount. However, your bank may flag large or unusual transactions for security reasons. These checks do not mean the gift is taxed.
While there is no bank transfer limit, HMRC’s inheritance tax rules still apply. If the gift is large, keep clear records so it can be reported properly if needed later.
