The Inheritance Tax gift rule many families overlook

Helping children or grandchildren with everyday costs, or giving them a financial head start, is something many families do without thinking about tax. Yet new research suggests that almost three quarters of UK adults (72%) do not realise that regular gifts from surplus income can be exempt from Inheritance Tax (IHT) immediately.

Why gifts from surplus income are a valuable exemption

The exemption is known as ‘normal expenditure out of income’. It allows qualifying gifts to be made without waiting seven years for them to fall outside your IHT calculation. Unlike many other gifts, you do not need to survive seven years, provided the strict conditions are met.

IHT rules are changing from April 2027, so more families may be thinking about how best to pass on wealth during their lifetime. For anyone with income left over after their usual living costs, regular gifting could be a tax-efficient way to support loved ones.

Three conditions to meet

• The gifts must come from income, not capital. That could include pension income, interest, dividends or rental income after tax, but not savings or investments.
• The gifts should form a recognisable pattern. Monthly payments or regular contributions are more likely to qualify than one-off gifts.
• You must keep your usual standard of living. If you have to dip into savings to cover normal living costs, the exemption may not apply.

Keep careful records of gifts from surplus income

Start by working out your regular net income and deducting your usual household spending. Any genuine surplus could potentially fund regular gifts from surplus income, and a standing order can help establish a clear pattern.

Good records matter just as much, because your executors may need to demonstrate that the exemption applies after your death. Keep bank statements, correspondence and a schedule of gifts. HMRC’s IHT403 form includes a section for recording gifts.

A simple test is to ask whether the gifts were part of a settled pattern, whether they came out of income rather than capital, and whether your standard of living stayed the same. If the answer to all three is yes, gifts from surplus income may qualify, but each case turns on its own facts.

Related reading: our guide to tax-free gifts to children and grandchildren, our overview of Inheritance Tax planning and HMRC’s own guidance on how Inheritance Tax works.