What is the 'gifts out of surplus income' exemption for inheritance tax?

Full answer

The 'normal expenditure out of income' exemption is one of the most powerful Inheritance Tax reliefs because qualifying gifts fall outside your estate immediately - there is no seven-year survival rule and no monetary cap, unlike the GBP 3,000 annual exemption. It suits people with pensions or investment income that comfortably exceeds their spending. Three conditions must all be met. First, the gifts must form part of your normal, habitual pattern of giving - for example a fixed monthly payment to a grandchild or regular premiums on a life policy written in trust. A one-off lump sum usually fails. Second, they must be made out of income (salary, pension, dividends, rent, interest) rather than from capital such as savings or sale proceeds. Third, after making the gifts you must be left with enough income to maintain your normal standard of living without dipping into capital. Worked illustration: if your net income is GBP 45,000 and you spend GBP 30,000, the GBP 15,000 surplus could be gifted each year free of IHT, on top of using your GBP 325,000 nil-rate band and GBP 175,000 residence nil-rate band on death. Good records are essential. Executors claim the exemption on form IHT403, which asks for a year-by-year breakdown of income, expenditure and gifts, so keep a simple ledger showing income in, normal spending out, and the regular gifts. The exemption is not affected by the 2026/27 frozen nil-rate bands, which makes it increasingly valuable as more estates are dragged into the 40% charge (36% where 10% or more is left to charity). Because the rules are judgement-based, many people take advice and document intent in writing. Use the inheritance tax calculator below to model your wider estate position.

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