Glossary · UK
What is Gift Out of Surplus Income?
An inheritance tax exemption for regular gifts made from your after-tax income that do not reduce your normal standard of living.
Full Definition
Gift out of surplus income, formally the 'normal expenditure out of income' exemption, lets you give away money free of inheritance tax (IHT) without it being treated as part of your estate, even if you die within seven years. To qualify, the gifts must form a regular pattern, be made from income (not capital), and leave you enough income to maintain your usual standard of living. Typical examples include regular payments into a grandchild's savings, life insurance premiums written in trust, or monthly cash gifts. Unlike the GBP 3,000 annual exemption, there is no fixed cash limit -- the test is whether the gift genuinely comes from surplus income. Executors claim the exemption on form IHT403, so keeping clear records of income and outgoings is essential. It matters because, alongside the GBP 325,000 nil-rate band and GBP 175,000 residence nil-rate band, it is a powerful, immediate way to reduce a 40% IHT liability. See gov.uk for full conditions.