We explain, in plain English, what gifts from surplus income means and why it can be one of the most practical ways to reduce inheritance tax for families in the United Kingdom.
This approach can remove certain payments from your estate straight away when done correctly. It does need consistent patterning, careful record-keeping and clear evidence that payments come from genuine extra funds rather than funds you need.
It suits those with steady pensions or investment returns who meet everyday spending comfortably. We will also show how this fits alongside broader estate planning so you see the full picture rather than relying on one option.
For practical steps, HMRC rules and sample calculations, read our guide on regular gifts out of surplus income inheritance tax. This is general guidance and not financial advice; rules and allowances may change.
Key Takeaways
- Clear rules: Proper payments can leave your estate straight away.
- Record-keeping: Consistency and evidence are essential for HMRC checks.
- Who it suits: Best for people with reliable pensions or investment returns.
- Holistic planning: Use this with other estate options, not alone.
- Protect first: Aim to keep your own security before passing on surplus.
Why gifts during your lifetime matter for UK inheritance tax planning
With HMRC taking a growing share, people are choosing to act earlier to protect value.
HMRC receipts reached £6.1bn in 2021/22, a record rise of 14% on the previous year. That shows more estates are being pulled into the net.
Thresholds are frozen until April 2028 and the rate stays at 40%. Over several years this can quietly increase what families pay, even if nothing else changes.
Inheritance tax receipts and what that signals for estates today
The climb in receipts is a clear signal. More estates now breach thresholds. Executors and families feel the impact when planning ends at the last minute.
Frozen thresholds until April 2028 and the 40% rate: why more families gift now
When thresholds do not rise with inflation, the taxable value of an estate grows by default. Lifetime transfers give families control over timing and value.
Why the “normal expenditure out of income” exemption is still underused
Only about 270 families successfully used this exemption in 2022/23, according to reports. Many people worry about the strict rules, and claims are made by executors after death.
For practical steps and a worked approach, see our short guide on setting up a gifts-out-of-income plan.
“With a simple routine and clear evidence, lifetime planning can be one of the most straightforward ways to reduce what ends up in the taxable estate.”
How the normal expenditure out of income exemption works
When payments follow a clear pattern and come from ongoing earnings, they can leave your estate straight away. We explain the rule in plain terms so you can see whether this route could suit your family.
- The payments form part of your usual spending and show a steady pattern.
- They are funded from earnings such as pensions, rent or dividends, not capital.
- They do not reduce your normal standard of living.
There is no fixed cap when these conditions are met. If you genuinely have spare earnings, larger transfers can be treated as potentially exempt and removed from your estate without waiting years.
This differs from the seven-year rule, which treats one-off donations as potentially exempt only after surviving seven years. Here, the protection is immediate when the facts and records back the claim.
For practical guidance on how HMRC views patterns and evidence, see our short note on normal expenditure guidance.
HMRC criteria your gifts must meet to qualify
The tests HMRC applies focus on pattern, source and whether you keep your usual lifestyle. We break each condition into simple checks you can use before you start.
The payments must form part of normal expenditure with a clear pattern
HMRC expects a steady pattern. That usually means similar amounts at regular intervals.
If the pattern is unclear, they may review roughly three to four years to see whether the person intended a repeatable approach.
The payments must be made out of income, not capital
Payments must come from earnings such as pensions, dividends or rent. Withdrawals that reduce capital can fail the test.
Watch out for investment bond withdrawals. Some withdrawals are treated as returns of capital even when they feel like earnings.
The payments must not reduce your usual standard of living
If making the payment means cutting bills, dipping into savings or worrying about day-to-day costs, HMRC will not accept the claim.
Keep a clear baseline of your regular outgoings so you can show the donor kept their usual standard.
How HMRC typically assesses pattern and intention over several years
HMRC looks for consistency. A multi-year run of similar payments makes the story credible.
Evidence does not need to be perfect. It should show a reasonable, consistent, income-funded approach that a third party can follow.
| Test | What HMRC looks for | Practical check |
|---|---|---|
| Pattern | Regular, repeatable payments over time | Standing orders or similar amounts over 3–4 years |
| Source | Funded from income not capital | Pension slips, dividend statements, rent receipts |
| Standard of living | Donor maintains usual spending | Budget showing baseline living costs and surplus |
For a short practical note on setting up a compliant plan, see our guide on inheritance tax free gifts: what you need to.
regular gifts out of surplus income inheritance tax uk: a step-by-step method to calculate what you can give
Begin with a clear tally of yearly receipts that truly behave like ongoing income.
Work out your net income sources that may count
List pensions, rental receipts, dividends, interest and any employment pay that shows on bank statements. Exclude amounts that come from selling assets or investment bond withdrawals because these count as capital.
List your regular expenditure to define your baseline lifestyle costs
Capture housing, utilities, food, insurance and regular commitments. Include predictable occasional costs such as annual car service or home insurance renewals so you do not overstate what you can spare.
Identify true surplus after maintaining your usual standard of living
Use this simple method each year:
- Add total net receipts for the year.
- Subtract agreed annual expenditure.
- The remainder is the potential surplus you can gift while keeping your standard of living.
Income vs capital: common grey areas that can cause problems
Money that feels like earnings can be capital in HMRC’s view. Investment bond withdrawals and sale proceeds often fail the test. Keep clear records showing pension payslips or dividend statements to prove the source.
Worked example
Example: a couple has net pension and investment receipts of £65,000 a year and annual expenditure of £50,000. That leaves £15,000 a year that could fund repeatable payments if evidence shows the money is not needed for living costs.
Once you know your figure, structure payments to look routine and well documented. For a practical next step, see our gift guide.
Setting up a regular gifting plan that stands up to scrutiny
A steady, well-documented plan makes decisions simple for your family and credible to HMRC.
Choose clear purposes that match real needs. Typical uses include school fees, university support, private healthcare and saving for grandchildren. These examples show a sensible reason for support and help explain why payments are repeatable.
Building a pattern that HMRC will accept
Use standing orders for repeat transfers. They create a visible routine and reduce missed months.
Keep amounts steady and timed the same way each year. Small, consistent sums look credible. Large, erratic sums invite questions.
Keeping flexibility while staying credible
If income shifts, adjust the level and record the reason. HMRC will accept changes if the overall story stays consistent.
Changing recipients within the same group — for example, from one grandchild to another — can work. The key is the continuing purpose and similar amounts over time.
- Pick a clear purpose (education, care, savings).
- Set a standing order on a sensible date.
- Document each transfer and keep proofs of source.
Once a gift leaves your account it is usually beyond your control, so talk with the family and set expectations.
| Step | Why it helps | Practical action |
|---|---|---|
| Choose purpose | Shows intention and reason | Note beneficiary and use in a simple plan |
| Set standing order | Proves regularity and timing | Arrange bank instruction and save confirmation |
| Keep records | Links payments to ongoing income | Store bank statements, payslips or pension slips |
Record-keeping and evidence: what your executors will need on death
Clear records make it far easier for executors to show that payments left the estate legitimately. Executors usually claim the exemption after death, so the burden of proof rests on what they can produce. Good evidence speeds up probate and reduces enquiries.
What to track
Track each payment with a short note that links it to your yearly budget. At minimum note:
- date
- amount
- recipient
- what it was for
- which income stream funded it (pension, dividend, rent)
Supporting documents HMRC may expect
HMRC looks for papers that prove the transfers were routine and came from earnings, not capital.
- bank statements showing the payments and the source
- payslips, pension slips or dividend statements
- a simple spreadsheet listing gifts made with dates and totals
- a short signed note explaining your intention to make continued payments
How this feeds into IHT403 and why detail matters
Executors complete the IHT403 when claiming the exemption. The form asks for dates, totals and the link to income and expenditure.
Missing detail can lead to delays, extra questions or a rejected claim. A tidy annual folder makes the job straightforward for the person handling affairs at death.
| Item | Why it helps | Example |
|---|---|---|
| Spreadsheet of gifts made | Summarises pattern and totals | Yearly sheet with dates, recipients, amounts |
| Bank statements | Shows actual transfers and source | Highlighted payments and incoming pension payslips |
| Written intention | Explains purpose and continuing plan | Signed letter saying payments were to carry on |
| Income/expenditure summary | Proves gifts were from income, not capital | Annual budget showing baseline spending and surplus |
Practical tip: keep a single annual “gifting folder” with the spreadsheet, slips and statements. That one place saves time and worry when the claim for IHT403 is prepared after death.
Conclusion
Simple, evidence-backed payments from continuing earnings often remove value from an estate straightaway. When the exemption conditions are met, this route can be an effective way to reduce what is liable to tax without waiting years.
Three pillars make the claim credible: a clear pattern, payments funded from ongoing income not capital, and the donor keeping their usual standard of living. Follow those rules and keep records.
For one-off transfers, the seven-year PET route still matters. Taper relief may reduce the charge after three years and no tax applies after seven years.
Make things easy for executors. A tidy folder and clear notes speed any IHT form and reduce enquiries. For practical steps see our short guide on gifts from income.
This is general guidance, not legal or financial advice. We recommend independent professional advice before you act, and always protect your own finances first.