Normal Expenditure Out of Income: The IHT Gift Exemption
How the normal expenditure out of income exemption lets you give away surplus income free of inheritance tax in 2026/27, with rules, records and examples.
Quick answer
Normal expenditure out of income is an inheritance tax exemption that lets you give away your surplus income free of IHT, with no cash limit. Qualifying gifts are immediately exempt and never enter the seven-year rule. To qualify, the gifts must be habitual, paid from income rather than capital, and must leave you enough to keep your normal standard of living.
Why this exemption matters
Most lifetime gifting in the UK runs into the seven-year rule. Give away a large sum and you generally need to survive seven years for it to fall fully outside your estate, with taper relief only nibbling at the bill after year three. The normal expenditure out of income exemption is different and far more generous: there is no time limit and no cap on the amount, as long as the money comes from genuine surplus income.
For someone with a comfortable pension or strong investment income who does not spend everything they receive, this exemption can shift tens of thousands of pounds out of the estate every year, immediately and permanently. With the nil-rate band frozen at GBP 325,000 and the residence nil-rate band at GBP 175,000, and the 40% IHT rate above that, regular gifting from income is one of the cleanest ways to reduce a future bill.
The three conditions in detail
All three tests must be satisfied. If a gift fails any one of them, it does not qualify and is treated like an ordinary lifetime gift.
1. The gift must be part of your normal expenditure
"Normal" means normal for you. HMRC looks for a settled pattern or a clear intention to give regularly. The easiest case is a fixed commitment, such as paying GBP 500 a month into a grandchild's account or covering school fees each term. A pattern usually emerges over a run of years, but a single first gift can still qualify if you record a genuine intention to continue, for example in a dated letter.
2. The gift must be made out of income
The money must come from income, not capital. Income includes:
- Salary and self-employment profits
- Pension income, including the state pension
- Rental profits
- Dividends and savings interest
It does not include the sale of assets, withdrawals of capital, or inheritances you receive. Income is generally measured after tax. If you give away more than your income in a year, the excess is treated as coming from capital and fails the test.
3. You must keep your usual standard of living
After making the gifts, you must be left with enough income to maintain your normal lifestyle. If you have to dip into savings or sell assets to cover your day-to-day costs because you gave too much away, the gifts will not qualify. The test protects you from giving away so much income that you end up funding your own life from capital.
A worked example
Margaret, a retired teacher, has the following annual income after tax. She wants to help her two grandchildren and reduce a future IHT bill.
| Item | Amount (after tax) |
|---|---|
| Defined benefit pension | GBP 28,000 |
| State pension | GBP 12,548 |
| Dividend and savings income | GBP 6,000 |
| Total income | GBP 46,548 |
| Normal living costs | GBP 30,000 |
| Annual surplus | GBP 16,548 |
Margaret sets up standing orders of GBP 600 a month to each grandchild -- GBP 14,400 a year in total. That sits comfortably within her GBP 16,548 surplus, comes entirely from income, and follows a regular pattern. Provided she keeps records, the full GBP 14,400 leaves her estate each year with no IHT and no seven-year wait. Over a decade that is more than GBP 140,000 removed from her estate, saving potentially GBP 57,600 in inheritance tax at 40%.
To see how income tax shapes the after-tax figures she is working from, the
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Open Inheritance Tax calculatorHow it compares with the annual exemption
The GBP 3,000 annual exemption is simple but capped, and it can come from capital. Normal expenditure out of income has no cash cap, but the money must be surplus income and the giving must be habitual. The two stack: you can use both in the same year.
| Feature | Annual exemption | Normal expenditure out of income |
|---|---|---|
| Cash limit | GBP 3,000 per year | No limit (only your surplus income) |
| Source of funds | Income or capital | Income only |
| Pattern required | No | Yes -- habitual giving |
| Seven-year rule | Not applicable | Not applicable |
| Who claims | Automatic | Executors via IHT403 |
Record keeping that survives HMRC scrutiny
The exemption is claimed by your executors after death on form IHT403, which asks for a year-by-year breakdown of income, expenditure and gifts. The single best thing you can do during your lifetime is keep a simple annual schedule:
- Total income for the year, after tax
- Total normal living expenditure
- The resulting surplus
- The gifts made from that surplus
Back it up with bank statements, dividend vouchers, pension statements and a dated letter setting out your intention to make regular gifts. Clear records turn a contestable claim into a straightforward one and spare your executors a difficult argument with HMRC at a stressful time.
Common mistakes to avoid
- Giving away more than your income, so the excess is treated as capital.
- Treating ISA or investment withdrawals as income when they are really capital encashment. Only genuine investment income counts.
- Making a single large one-off gift and labelling it "regular" with no evidence of intention.
- Leaving no records, so executors cannot prove the gifts came from income.
- Cutting your own standard of living to fund the gifts, which breaks the third test.
How it fits the wider IHT picture
Normal expenditure out of income works best as one tool among several. It sits alongside the nil-rate band of GBP 325,000, the residence nil-rate band of up to GBP 175,000 where a home passes to direct descendants, the spouse exemption, gifts to charity (which can cut the rate from 40% to 36% if you leave 10% or more of your net estate), and the GBP 3,000 annual exemption. Specific reliefs such as business or agricultural property have their own detailed rules, so check the current position on gov.uk before relying on them.
Because the exemption removes value from your estate immediately, it is especially valuable for people whose estates already exceed the frozen nil-rate bands and whose income comfortably outstrips their spending. Start early, give consistently, and document everything.
The bottom line
If you have genuine surplus income, normal expenditure out of income is one of the most efficient inheritance tax planning tools available. There is no cap, no seven-year wait, and qualifying gifts leave your estate the moment they are made. The price of admission is discipline: give from income, give regularly, keep your lifestyle intact, and keep good records so your executors can prove the claim. Run the numbers for your own estate with the
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Estimate Inheritance Tax liability on an estate with our UK IHT calculator.
Open Inheritance Tax calculatorFrequently asked questions
What is the normal expenditure out of income exemption?
It is an inheritance tax exemption that lets you make regular gifts from your surplus income, completely free of IHT and with no upper limit, provided three conditions are met. The gifts must form part of your normal pattern of giving, must be made out of income rather than capital, and must leave you with enough income to maintain your usual standard of living. Unlike most gifts, qualifying payments are immediately exempt and never form part of the seven-year rule.
Is there a limit on how much I can give?
No. Unlike the annual exemption of GBP 3,000, there is no cash cap on normal expenditure out of income. The only limit is your genuine surplus income. If you regularly have several thousand pounds of income left over each year after meeting your living costs and tax, you can give all of that surplus away tax-free. The amount must come from income, not from selling assets or drawing down savings built up in earlier years.
Do these gifts count towards the seven-year rule?
No. This is the major advantage. Gifts that qualify as normal expenditure out of income are immediately exempt from inheritance tax. They are not potentially exempt transfers, so there is no seven-year clock and no taper. Even if you die the day after making a qualifying gift, it falls outside your estate. By contrast, ordinary lifetime gifts only escape IHT fully if you survive seven years from the date of the gift.
What counts as income for this exemption?
Income includes salary, pension income, the state pension, rental profits, dividends, savings interest and similar recurring receipts, generally measured after tax. It does not include capital. Withdrawals from an ISA can be treated as income only if they represent genuine investment income rather than encashing the capital. Lump sums, the sale of property or shares, and inheritances you receive are capital and do not qualify, although the income they later produce can.
How does HMRC decide if gifts are 'normal'?
HMRC looks for an established pattern of giving. A regular commitment, such as a fixed monthly payment to a grandchild or paying their school fees each term, clearly shows a habit. A single gift can still qualify if you can show a settled intention to keep giving, for example a signed letter setting out your plan. The word 'normal' means normal for you, judged over a reasonable period, not normal for an average person.
What records should I keep?
Keep evidence that links each gift to income, not capital. HMRC's form IHT403 asks for a year-by-year breakdown of your income, your expenditure and the gifts made. The cleanest approach is a simple annual schedule showing total income after tax, your living costs, the surplus, and the gifts paid from it. Keep bank statements, dividend vouchers and a dated letter stating your intention to make regular gifts. Good records make the claim far easier for your executors.
Can I use this exemption alongside other IHT exemptions?
Yes. Normal expenditure out of income sits on top of the annual exemption of GBP 3,000, the small gifts exemption, wedding gifts and gifts to spouses or charities. You can combine them in the same year. For example, you might pay regular monthly gifts from income under this exemption and also use your GBP 3,000 annual allowance for a one-off gift from capital. Each exemption is assessed against its own rules.
Does pension income count, including the state pension?
Yes. The new full state pension is GBP 241.30 a week, around GBP 12,548 a year, and counts as income for this exemption, as do workplace and personal pension payments. If your total income comfortably exceeds your spending, the surplus can fund qualifying gifts. Many retirees with generous defined benefit pensions or large drawdown income are well placed to use this exemption, because their income exceeds what they need to live on.
Who claims the exemption and when?
The exemption is claimed by your executors after you die, using form IHT403 as part of the estate's inheritance tax account. It is therefore vital that you leave clear records during your lifetime so your executors can prove the gifts were habitual, made from income and did not affect your standard of living. Without that evidence the claim may fail and the gifts could be pulled back into your estate and taxed.
What is the inheritance tax rate if the exemption does not apply?
If gifts do not qualify and fall into your taxable estate, inheritance tax is charged at 40% on the value above your available nil-rate band of GBP 325,000, plus the residence nil-rate band of up to GBP 175,000 where you leave a home to direct descendants. The rate falls to 36% if you leave at least 10% of your net estate to charity. Use the inheritance tax calculator to estimate the liability on your own estate.
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Related reading
Gifts Out of Surplus Income: The IHT Exemption Guide
How the normal expenditure out of income IHT exemption works in 2026/27, who qualifies, the records HMRC wants, and how to gift unlimited amounts free of inheritance tax.
Gift With Reservation of Benefit: The IHT Trap Explained
How the gift with reservation of benefit rules drag gifts back into your estate for inheritance tax in 2026/27, plus how to avoid the trap legally.
Gifting Money in the UK 2026 — Tax Rules, Limits and the 7-Year Rule
There is no gift tax in the UK. But gifts can affect your Inheritance Tax liability. You can give away unlimited cash gifts during your lifetime — but if you die within 7 years, some gifts may be included in your estate. Here's the complete guide.