Will I be Taxed on Gifted Money for my House Deposit?

If you’ve ever heard this sentence from a loved one, ‘We’d love to help you with a deposit, but what about getting taxed?’ - you’re not the only one. It may sound silly to some, but this is actually a very common question that crops up in Conveyancing and the best thing is that the short and sweet answer is: No, you will NOT be taxed – Hoorah!

So, why is it asked so much and what is causing all the confusion? 

With house prices where they are, financial help from parents or grandparents has become incredibly common. The ‘Bank of Mum and Dad’ is now one of the biggest contributors to first-time buyer purchases in the UK.

However, tax rules can feel like a bit of a grey area and people worry about ‘gift tax’, unexpected bills and whether HMRC will take a slice of the money. With all the speculation and hearsay associated with the subject, let’s look into some of the typical misconceptions and try and clear things up. 

This is the biggest misconception, but just to confirm, the UK does not have a gift tax. If your parents wish to transfer £30,000, £80,000 or even £200,000 into your account to help you buy a house, you do not pay income tax on it. You do not declare it on your tax return. It is not treated as earnings. HMRC does not tax you for receiving it.

Therefore, from the buyer’s perspective, a genuine gift is completely tax-free. 

So, if this is the case, why does this topic confuse so many people? Because while there’s no tax on receiving the gift, large gifts can become relevant for Inheritance Tax purposes - but this is only in certain circumstances and that’s where the ‘seven-year rule’ comes in, which people may have heard of.

Sound scary again? Let’s explain…

Each person in the UK can give away £3,000 per tax year without it counting towards their estate for inheritance tax purposes. This is called the annual exemption and is calculated on £3,000 per person giving the gift. It resets every tax year (6 April to 5 April) and if you didn’t use last year’s allowance, you can carry it forward one year.

So, in practice a parent who didn’t use last year’s exemption could gift £6,000 this year tax-free. Two parents together could potentially gift £12,000 in one tax year without any inheritance tax implications at all. For smaller gifts, that may be enough, but realistically, most house deposits today are much larger than this.

So, what happens when parents gift £50,000 or £150,000?...

If you give more than your £3,000 annual allowance, the extra amount becomes what’s known as a Potentially Exempt Transfer. Don’t let the name intimidate you, it simply means:

• There’s no tax at the time of the gift.
• If the person giving the gift lives for seven years afterwards, the gift becomes fully exempt from inheritance tax.
• If they die within seven years, the gift may be considered when calculating inheritance tax on their estate.

That’s it!

The seven-year clock starts from the date the gift is made.

Let’s say parents gift their son £120,000 for a flat deposit. At the time of the transfer:

• No tax is due.
• The son pays nothing.
• There’s no “gift tax”.

If the parents live for seven years after making the gift - that £120,000 is completely outside their estate for inheritance tax purposes. It will never be taxed.

If one parent dies within seven years - the gift is added back into their estate when calculating inheritance tax. But, tax is only payable if the estate exceeds the inheritance tax threshold. Which brings us to the next key piece of the puzzle…

Currently, each person has a tax-free inheritance allowance of £325,000 and anything above that may be taxed at 40%. There is also an additional allowance (the residence nil-rate band) of up to £175,000 when passing a home to direct descendants and married couples can combine unused allowances. Therefore, in some cases, couples can pass on up to £1million before inheritance tax applies.

What does this mean in practice?

If someone’s total estate (including any gifts made in the last seven years) is below the relevant thresholds, no inheritance tax is due. So even if a parent dies within seven years of gifting a deposit, there may still be no tax to pay. 

This is why many families who gift deposits never actually trigger inheritance tax in reality.

Again, short and sweet – No!

There is no legal cap on how much you can gift in the UK. You can gift however much you like, be it £1,000, £10,000, £1,000,000 and the only thing you need to consider is inheritance tax planning - there is no rule limiting how much parents can give toward a house deposit. The only thing you need to consider when making such a gift is the impact this could have on inheritance tax and you should seek advice if this is of concern.

So that it’s clear, if you receive a genuine gift:

• You do not pay income tax.
• You do not pay capital gains tax.
• You do not declare it as earnings.
• You do not notify HMRC.

There is no “receiver tax”.

As mentioned above, the only time it might become relevant is if inheritance tax becomes payable after the donor’s death and the estate cannot cover it - which is relatively uncommon. For most buyers, the gift has no tax consequences at all.

While HMRC may not tax the gift, your mortgage lender will want clarity. So, if you plan on using gifted money, here’s what they will require:

• A gifted deposit letter confirming the money is not a loan.
• Proof of ID from the person giving the gift.
• Evidence of where the money came from (bank statements accumulating the funds).
• Confirmation the giver won’t have an interest in the property.

Lenders care because if the money is actually a loan, it affects affordability. However, this is a lending issue, not a tax issue.

The same requirements will be demanded from your Conveyancer/ Solicitor. Due to Anti-Money Laundering regulations, it is mandatory that the necessary checks are carried out on not only you as a buyer, but also on the gifter/s providing you with the funds for the purchase.

Don’t feel that this is a ‘personal attack’ or invasion of privacy, this is perfectly normal and the standard procedure across the UK for buying a home. T’s must be crossed and I’s must be dotted.

Like most other answers, it’s another ‘No’.

You do not need to a be a First-Time Buyer to accept gifted deposit monies, it doesn’t matter whether a gift is used to buy your first home, second, third or even in the event of a remortgage. 

You also do not have to be a child receiving funds from a parent or grandparent. Individuals may accept gifted funds from a partner/ spouse, child or sibling. In other cases, you may also be able to accept funds from other relatives such as aunts, uncles and cousins, so long as your chosen mortgage lender approves this. 

‘My parents are giving me £50,000. Will I be taxed?’

No. The only consideration is inheritance tax if they die within seven years and their estate exceeds the threshold.

‘What if they give me £200,000?’

Still no immediate tax. It falls under the seven-year rule, but there’s no upfront charge.

‘What if they live more than seven years?’

Then the gift is fully outside their estate provided they have not benefitted from the gift in any way.

‘What if they’re married?’

Each parent has their own £3,000 annual exemption and their own inheritance tax allowance. Married couples can also pass unused allowances to each other.

Should You Be Worried? For the majority of people in most situations, no.

Things only become more relevant for larger estates already close to or above inheritance tax thresholds. In those cases, gifting strategy and timing can make an important difference.

However, if you’re simply helping a child or family member buy a house in the UK, you can gift money without triggering tax at the time and for most families, gifting a deposit is far simpler and less risky (from a tax perspective) than people usually assume. 

The main thing is that you understand inheritance tax thresholds - not worrying about a gift tax that doesn’t exist!

• There is no gift tax.
• There is no income tax.
• There is no reporting requirement.
• There is no immediate inheritance tax.
• Often no inheritance tax later either.
• £3,000 per year per person is automatically exempt.
• Larger gifts are covered by the seven-year rule.
• If you survive seven years, the gift becomes fully tax-free. (provided the giftor does not benefit from the gift).
• Regular gifts from surplus income can be immediately exempt.
• There is no maximum limit on how much you can give.
• The recipient never pays income tax on the gift.

We would always recommend seeking professional advice if you are considering making a gift to fund a deposit to ensure there is no detrimental impact on your estate, depending on your circumstances.