October 7, 2026
Understanding gifting out of income – how regular gifts could help reduce Inheritance Tax
| Gifting out of surplus income allows you to make regular gifts from your income, rather than your savings or other capital | Unlike many other gifts, qualifying gifts can fall outside your estate immediately, provided relevant conditions are met | With the April changes bringing IHT into sharper focus for many families, now could be a sensible time to review your arrangements |
From April 2027, changes to Inheritance Tax (IHT) mean that, in many cases, unused pension funds and death benefits may form part of an individual’s estate for IHT purposes. While the changes won’t affect everyone, they have prompted many families to review their estate planning and consider the options available for passing on wealth during their lifetime.
One often-overlooked opportunity is the ‘gifts out of surplus income’ exemption. When the conditions are met, it allows you to make regular gifts to loved ones that are immediately exempt from IHT, while helping to reduce the value of your estate over time.
What is the ‘gifts out of surplus income’ exemption?
The exemption allows you to make regular gifts from your income, rather than your savings or other capital, without those gifts being included in your estate for IHT purposes when you die.
Unlike many other gifts, qualifying gifts can fall outside your estate immediately, provided relevant conditions are met.
For more information, see HMRC guidance on gifts out of surplus income.
The three key conditions
To qualify, three key conditions must be met:
1. The gifts should form part of a regular pattern
The gifts should be made on a regular basis rather than as one-off payments. While they don’t have to be made every month, there should be a clear intention for the gifting to continue.
Keeping a simple record of your intentions and the gifts you make can be helpful.
2. The gifts must come from income
The gifts must be funded from your regular income, such as salary, pension income, rental income or investment income, rather than from savings or other capital.
3. You must still maintain your normal standard of living
After making the gifts, you should still have sufficient income to cover your normal living expenses and maintain your usual standard of living.
HMRC provides further information on the conditions that need to be satisfied for the exemption to apply.
Everyday examples
Many people already make regular financial gifts without realising they could qualify for this exemption. Examples include:
- Helping to pay a grandchild’s school or university fees
- Paying into a child’s savings account each month
- Contributing towards a family member’s rent or mortgage
- Providing ongoing financial support to elderly relatives or other loved ones.
Where the qualifying conditions are met, these gifts could reduce the value of your estate while allowing you to support loved ones during your lifetime.
Why keeping good records matters
Keeping accurate records is important. It’s sensible to retain details of:
- Gifts you’ve made
- When they were made
- Where the money came from
- Evidence that you continued to maintain your normal standard of living.
Clear records will make it easier for your executors to demonstrate that the exemption applies if HMRC requests evidence.
A valuable part of wider estate planning
This exemption can also work alongside other IHT Tax gifting allowances, making it a useful part of a wider estate planning strategy.
With the April 2027 changes bringing IHT into sharper focus for many families, now could be a sensible time to review your arrangements and consider whether regular gifting could form part of your long-term plans.
However, every family’s circumstances are different and the rules can be complex. Before putting any gifting strategy in place, it’s important to seek professional advice to ensure it is appropriate for your individual circumstances.
If you’re considering making gifts as part of your estate planning or would like to understand how the April 2027 changes could affect you, get in touch with our team to discuss your options.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. The Financial Conduct Authority does not regulate Will writing, tax and trust advice and certain forms of estate planning. Tax treatment depends on individual circumstances and may be subject to change. Gifting and trust strategies can have tax implications and may not be suitable for everyone
