Cash Gifts And HMRC: What Property Buyers Should Declare

Kitchen With Wooden Round Table and Chairs

In the UK’s expensive property market, first-time buyers often depend on financial help from family to get onto the ladder. Monetary gifts can make the difference in affording a deposit and securing a mortgage. However, receiving large sums of cash brings certain legal and tax obligations. While gifting money is generally perfectly legal, recipients must take care to properly declare these funds to HM Revenue and Customs (HMRC) if required. This article examines when cash gifts impact taxes owed, how to correctly report them, and the right approaches for buyers and givers to take.

Understanding Tax on Gifts

Most cash gifts made in the UK do not incur tax payments. HMRC provides yearly tax-free allowances for gifts given by individuals. For the current 2022/23 tax year, the threshold is £3,000 per donor. So you can receive £3,000 from any relative or friend tax-free. Higher lifetime gift allowances also apply, up to £325,000. These generous tax exemptions mean many common gifts for weddings, birthdays or housing deposits do not need declaring.

However, there are circumstances where large monetary gifts must legally be reported. Tax issues typically arise if gifted sums:

  • Exceed the £3,000 yearly threshold from a given giver
  • In total exceed the lifetime thresholds across all gifts
  • Are from the inheritance left early by a deceased relative
  • Come from abroad and exceed allowance thresholds

Buyers receiving taxable-level sums must take action to account for capital gains or inheritance tax. Failing to report gifts used for purchases like property deposits could lead to penalties and interest on unpaid dues down the line.

Cash Gifts Over the Annual Threshold

If you receive more than £3,000 in total from an individual in any tax year, the excess becomes taxable. For example, if parents gift their child £5,000 as a housing deposit, the final £2,000 exceeds the allowance and must be reported. The recipient in this case must inform HMRC and pay Capital Gains Tax (CGT) on the £2,000 at their income tax rate. Important to note, that the £3,000 exemption still applies to the first portion received. Only cash exceeding the annual limit gets taxed.

In another scenario where a buyer receives £10,000 combined from parents and grandparents, they would pay CGT on £7,000. The first £3,000 from each giver remains tax-free. Any further amount above this threshold is considered income for tax purposes in the year received.

Substantial Lifetime Gifts

Over longer periods, lifetime tax-free thresholds also apply to gifts. Currently, each individual can gift up to £325,000 over their lifetime without the recipient paying Inheritance Tax. Beyond this cap, any cash gifts must be reported to HMRC. Property buyers who receive sums from relatives towards purchases should keep track of previous gifts that count towards the lifetime limit.

For substantial gifts over £325,000 that must be declared, the excess gets added to the estate of the giver for Inheritance Tax purposes when they pass away. The recipient does not pay tax immediately but may have a future Inheritance Tax liability. This depends on the giver’s estate value when they die and if it exceeds the nil-rate band, currently £325,000.

Early Inheritance Money

Another scenario where reporting is required is when someone receives money early from the estate of a deceased relative. Gifted inheritance money always constitutes taxable income, no matter the amount. The full value gets added to the recipient’s income for the tax year it was received. Heirs who have money gifted early for a specific purpose like a housing deposit must declare this to HMRC and pay applicable Capital Gains Tax. Any unspent inheritance money not used for the stated purpose also remains taxable.

Overseas Cash Gifts

When receiving money from overseas, stricter rules apply compared to UK gifts. Only minor sums below £2,500 per tax year from each non-UK relative remain tax-free. Anything above this figure from foreign families or connections must be reported to HMRC as income by the recipient. Careful record keeping is essential to tally funds received from abroad, with any amounts over the allowance liable for tax.

Trust Fund Issues

An additional issue to consider is any income received from a trust fund. Payments made regularly to beneficiaries from UK trusts permitting capital distribution also count as taxable income. Depending on the type of trust and its terms, fund payouts may need to be declared each year on tax returns and paying applicable CGT or Income Tax.

How to Correctly Report Gifts to HMRC

For taxable cash gifts, declaring and paying dues promptly helps avoid future penalties. Recipients should:

  • Keep dated gift receipts showing amounts paid in and sources.
  • Track gifts against lifetime and yearly allowances to identify taxable sums.
  • Report any excess on Self Assessment tax returns under question 12b.
  • Pay CGT or Income Tax as required based on the taxable gift income.

If inheritance sums get gifted early, reporting takes place under question 19 of the tax return related to one-off income payouts. Any taxable trust income gets reported under question 17 about trust funds and estates. HMRC’s online guides detail the appropriate reporting steps once recipients determine taxable gift amounts based on stated allowances.

Getting Valid Gift Declarations

To ensure at the mortgage application stage that necessary tax gets paid, buyers should request valid gift declarations from each donor. These declarations signed and dated by the giver confirm:

  • The gift amounts and dates are provided.
  • Confirmation it is an unencumbered gift not requiring repayment.
  • The relationship of the giver to the recipient.
  • That the giver reserves no rights or interest in the property purchased.

With these points covered in a formal declaration, buyers can prove to lenders that cash gift rules are followed and the funds do not constitute a secret loan. Signed gift statements protect all parties should HMRC later audit declared incomes.

What Gift Givers Must Consider

Donors also play an important role by:

  • Keeping within tax exemption limits per recipient each tax year.
  • Recording total lifetime gifts made to each individual.
  • Making cheques out directly to solicitors, not recipients.
  • Signing a proper gift declaration for the recipient.

By gifting responsibly with tax implications in mind, relatives can provide deposit support without causing headaches. Taking prudent steps like capping gifts below the £3,000 tax-free limit where possible helps. Seeking tax advice around trust funds and inheritance gifting ensures full compliance too.

With large cash gifts, getting professional guidance about CGT and Income Tax liabilities gives recipients and givers alike peace of mind. Correctly reporting when required keeps everything above board.

Other Property Purchase Funding Options

Beyond monetary gifts, buyers have to expand options to fund deposits without relying too heavily on relatives. Some popular alternatives include:

  • Government schemes like Help to Buy equity loans and Shared Ownership.
  • Lifetime ISAs offer tax-efficient first-time buyer savings.
  • Low-deposit mortgages and lender guarantees via schemes like HomeBuy.
  • Developer contributions through discount market schemes.
  • Employer support packages or early pension release in some cases.

Combining these routes with moderate family gifts can help first-timers get on the ladder without tax trouble. Buyers should research if they qualify for any schemes or workplace assistance to buy responsibly.

How Much Cash Gift is Usual for First-Time Buyers?

With UK property prices rising over recent decades, first-timers often need significant financial help from parents to afford deposits. According to MoneySuperMarket research in 2022, the average cash gift for initial property purchases now stands at £25,000. One in ten first-time buyers rely on family gifts of £50,000 or more. 85% of those buying their first home currently receive some monetary gift to make it happen.

Contribution amounts vary widely based on parents’ ability to help out. But with average first-time deposits at nearly £60,000, gifts up to the tax-free £3,000 annual exemption may not go far enough. This makes careful planning vital to legally spread larger gifts over time.

Saving to Buy a Home Without Relying on Gifts

Another option is reducing gift reliance by saving hard towards a deposit from an early age. While buying a first property remains challenging without help, it is possible with persistence. Tips include:

  • Opening a Lifetime ISA at 18 to maximise tax-free savings.
  • Living at home with parents to control costs.
  • Avoiding lifestyle inflation as earnings increase.
  • Investing lump sums from bonuses wisely in deposits.
  • Taking on side gigs or a second job to earn more.
  • Embracing a frugal mindset and tracking spending.
  • Saving at least 20% of take-home income.

With this disciplined approach, first-timers could potentially accrue a £60,000 deposit after around five years, without cash gifts. Self-funding takes longer but reduces tax worries and reliance on others.

Conclusion

Cash gifts often make all the difference for first-time buyers struggling to cover rising deposit costs. So, If you are still thinking “Do I need to declare cash gifts to HMRC UK?”, well, to avoid HMRC tax headaches, recipients must properly declare amounts over allowance thresholds. Keeping good records, using tax exemptions wisely, and reporting excess sums promptly keep property transactions above board. Seeking professional advice around substantial gifts helps steer clear of penalties down the road. While getting generous help from family to buy a home can be tempting, staying tax-compliant remains essential. With some prudent planning around gifted funds, first-timers can happily achieve their property dreams without unwanted tax surprises.

We are proud members of...

  • NAPB
  • RICS
  • The Property Ombudsman
  • Trading Standards

We are proud to be the most regulated property buyer operating in the ‘Quick House Sale’ industry. We are an active member of the NAPB (National Association Of Property Buyers) and are RICS regulated, which means you can have every confidence of selling your home with us quickly & easily.