Explaining unexplained bank deposits to HMRC

If HMRC finds deposits in your bank accounts that your declared income does not explain, you need to show, deposit by deposit, where each one came from. Gifts, loans, transfers between your own accounts, legacies and sales of personal possessions are not taxable income, but HMRC will not accept that label without evidence, and in an appeal the burden of proving the explanation is on you.

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Why does HMRC ask about individual deposits?

Because unexplained money going into an account is one of the clearest signs that income may be missing from a return. HMRC’s Enquiry Manual at EM3550 says that once an officer has found business records are not as accurate as they should be, the enquiry turns to the private side, using cash tests, means tests and capital statements.

EM3560 tells officers to examine private statements for lodgements that are not recorded withdrawals from the business, or that look inconsistent with the drawings figure. It accepts that many will have a perfectly acceptable explanation, but some could be money diverted from the business. Under EM3555, if a cash test shows a shortfall and the taxpayer cannot give a reasonable explanation, the officer may assume it represents extra drawings or an undisclosed source of income.

HMRC should not routinely ask for private statements in its opening letter. Our page on whether you must hand over personal bank statements explains when it can, and capital statements covers the wider reconciliation of wealth and spending.

Who has to prove where the money came from?

In practice, you do. Section 50(6) of the Taxes Management Act 1970 lets the tribunal reduce an assessment only if it decides the appellant is overcharged; otherwise it stands. The cases HMRC cites show what that means for deposits:

In Kilburn v Bedford (EM2104), a hairdresser said capital increases came from betting winnings. The High Court said it was for him to prove that, and he had made no serious attempt to do so.
In Roberts v McGregor (EM2105), the court said the onus was clearly on the appellant to show the assessments were excessive.
In Yoannou v Hall (EM2110), a claimed £3,000 loan from a friend who did not want it back was among explanations the Commissioners were entitled not to accept.

HMRC cannot simply invent a source, though. EM1900 says there must be evidence of a source and of a link to the taxpayer, and that if the officer cannot reasonably identify a source for the capital, a discovery assessment cannot be made. The same page tells officers that where the taxpayer lives with someone who is self employed or is a director of a close company, they should assume the money is a gift from that person unless that is impossible, and then consider whether the gifts could have come from that person’s declared profits.

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How will HMRC test your explanation?

Sceptically. EM2051 tells officers to ask about cash savings, loans and gifts early in an enquiry, to head off later claims, and to question closely any claim first raised at a meeting. EM2053 says such claims are often put forward only after understatements are found and should not be accepted unless the officer is satisfied they are correct. Officers are told to look for:

inconsistencies, and a lack of authentic detail, in what is said;
whether documents look genuine and whether they explain the whole of the deficiency;
whether third parties who support the story have a vested interest.

EM2056 adds that contradictions between explanations given at different times are noted for later use, although a failure to remember is not in itself proof of something to hide. The lesson is to give one complete, consistent explanation, in writing, with documents, as early as possible.

What evidence supports a gift from family?

The strongest evidence traces the money from the giver’s account to yours:

the giver’s bank statement showing the same amount leaving their account on or shortly before the date it reached yours;
a short letter from the giver confirming the amount, the date, that it was a gift and that no repayment is expected, dated when it is actually written;
something showing the giver could afford it, such as a pension, savings or a property sale.

EM2054 says a statement from another person is of limited value unless it gives specific amounts and facts within their own knowledge. HMRC may write to the person, meet them or ask them to attend an appeal hearing, and a sworn declaration is accepted only if the witness is not available for interview. EM2095 says a claimed cash gift from someone who has since died needs strong evidence. A genuine gift is not income of the person receiving it; see tax on money you are gifted.

How do you prove a loan or a transfer between accounts?

For a loan, show that it was a loan at the time: a written agreement or contemporaneous messages, the lender’s record of the advance, and repayments going back out of your account. A “loan” with no terms that has never been repaid looks like a gift or like income. Money from your own company should appear in the company’s books, usually through the director’s loan account.

For a transfer between your own accounts, produce the statement for the other account showing the matching debit, and then explain how the money got into that account. EM3560 points out that transfers to or from other accounts may reveal accounts HMRC did not know about, which it will want to see, and that transfers with a spouse’s or partner’s account show their finances are linked and bring that account into the enquiry. Give a full list of accounts at the outset rather than letting HMRC find them one at a time.

What about legacies, sales of possessions and cash?

EM2095 says a legacy is capable of proof and full documentary evidence should be called for, such as the will, estate accounts or the executor’s letter. Claimed sales of jewellery, coins or collections need evidence for all but small amounts, and HMRC notes that household insurance schedules usually list valuable items. For a car or other item sold privately, keep the advert, the buyer’s payment reference and any transfer document.

Cash paid in is the hardest to explain. EM2051 lists cash hoards among the classic non taxable source claims, and EM2053 asks whether someone who banked all surplus business money for fear of robbery would really keep large sums at home. Unless withdrawals of the same cash can be traced earlier, expect a cash hoard story to be challenged.

How should you set out the answer?

Build a schedule of every credit HMRC has queried, with the date, amount, account, payer reference, explanation and a reference to the supporting document. Illustration only. Priya, a self employed designer, declared profits of £32,000. HMRC asks about £41,500 of credits in her personal account:

Credit	Explanation	Evidence
£20,000	Gift from her father	His statement showing the same day debit and a signed gift letter
£12,000	Withdrawal from her own ISA	ISA statement showing the withdrawal
£6,000	Loan from a friend	Agreement signed at the time and five £500 repayments so far
£2,300	Sale of her old car	Advert, buyer’s transfer reference and logbook change
£1,200	Six cash deposits	None: she accepts these were unrecorded takings

Conceding the £1,200 and correcting the return is far more credible than an unsupported story, and the way an error is disclosed affects penalties for tax return errors.

What mistakes make it worse?

Vague answers such as “help from family” with no names, amounts or dates.
Changing the explanation once HMRC challenges it.
Producing letters written now but presented as if written years ago.
Leaving out accounts that later appear in transfers.
Relying on statements from relatives that give no specific figures.
Ignoring a formal Schedule 36 information notice for the documents.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.