The short answer
You do not pay income tax or capital gains tax on gifts you receive. Inheritance Tax (IHT) only applies in very specific circumstances: when the estate of someone who has died exceeds the nil-rate band, and they made gifts within seven years of death that push the taxable value over the threshold.
For the vast majority of people, gifts — including cash for a house deposit, wedding presents, or birthday money — are completely tax-free with no reporting required.
How Inheritance Tax works
IHT is charged at 40% on the value of an estate above the nil-rate band when someone dies. The key thresholds for 2025/26 are:
- •Nil-rate band — £325,000. The first £325,000 of any estate is IHT-free. This has been frozen since 2009.
- •Residence nil-rate band — £175,000. An additional allowance when a main residence is passed to direct descendants (children or grandchildren).
- •Spouse / civil partner exemption. Anything left to a spouse or civil partner is completely exempt from IHT, and unused nil-rate bands can be transferred to the surviving partner.
A married couple can therefore pass on up to £1,000,000 (£325k + £175k each) before IHT applies — provided a family home is included and left to children or grandchildren.
The 7-year rule
When you give a gift during your lifetime, it becomes a potentially exempt transfer (PET). If you survive for seven years after making the gift, it falls completely outside your estate and is fully exempt from IHT.
If you die within seven years, the gift is added back to your estate for IHT purposes. However, taper relief reduces the tax charged on gifts made between three and seven years before death:
Key point: The 7-year rule is only relevant if the total value of gifts made in the seven years before death exceeds £325,000. Below that threshold, no IHT is due on gifts regardless of timing.
Common myths
“I can only give £3,000 per year”
False. You can give away as much as you like. The £3,000 annual exemption is simply the amount that is always exempt from IHT, even if you die the next day. Gifts above £3,000 become potentially exempt transfers — fully exempt after seven years.
“My children will pay tax on a house deposit”
Almost certainly not. A cash gift for a house deposit is not subject to income tax or CGT. IHT would only be relevant if the giver dies within seven years and their estate plus gifts exceed the nil-rate band — a situation that affects very few families.
“I need to report gifts to HMRC”
Only if IHT is actually due. There is no general requirement to report gifts during your lifetime. The executor of an estate reports gifts made in the seven years before death only when filing for probate.
When to seek professional advice
For most people, IHT is not something to worry about. However, it may be worth speaking to a qualified financial adviser or solicitor if:
- •Your estate (including property, pensions, and investments) is likely to exceed £500,000 as an individual, or £1,000,000 as a couple.
- •You have complex trust structures or business assets that may qualify for Business Relief.
- •You hold international assets or have connections to other tax jurisdictions.
Focus on what you can control now
IHT planning is a long game. In the meantime, make sure you are not over-paying tax on your current income — check your salary deductions, pension relief, and whether any tax traps apply.