Gifts Out of Regular Income Exemption

A powerful way to reduce inheritance tax while supporting loved ones

What is the "Gifts Out of Regular Income" Exemption?

This valuable but often overlooked exemption allows you to give away surplus income completely free from Inheritance Tax. If you have money left over after paying for your normal living expenses, you can gift that extra income to loved ones without it counting towards your estate for inheritance tax purposes.

These gifts are officially referred to by HMRC as "normal expenditure out of income."

For example:

You might pay your grandchild's university rent each month or give your children a fixed amount annually from your pension income. As long as these gifts are affordable for you and meet certain conditions, they can be completely exempt from inheritance tax.

Key Benefits

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Immediate exemption — No need to survive 7 years for the gift to be tax-free
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No upper limit — Unlike the £3,000 annual gift allowance, you can give as much as your genuine spare income allows
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Estate reduction — Helps reduce your taxable estate over time, potentially saving your family 40% tax on gifted amounts
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Additional to other exemptions — Can be used alongside your £3,000 annual exemption and other allowances
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Flexibility — You can stop or change the gifts if your circumstances change without affecting the exempt status of previous gifts

Conditions to Qualify

For gifts to qualify under this exemption, they must meet three essential criteria:

1

Regular Pattern

The gifts must form part of your normal expenditure – a regular pattern of giving that becomes habitual for you (monthly, quarterly, or annual gifts all qualify)

2

From Income

Gifts must come from your income (salary, pension, interest, dividends, etc.) – not from capital, savings, or by selling assets

3

Maintain Lifestyle

You must retain sufficient income after making the gifts to maintain your normal standard of living

A Simple Example

Mrs. Smith is 70 years old with a pension of £4,000 per month.

  • Her monthly living expenses total £3,000
  • This leaves £1,000 surplus income each month
  • She sets up a standing order of £500 each month to her two children (£1,000 total)
  • She maintains records of her pension income and expenses
  • She continues her normal lifestyle without touching her savings

Result:

When Mrs. Smith eventually passes away, these gifts (£12,000 annually) are completely exempt from inheritance tax under the "gifts out of regular income" rule.

Tax saving: £4,800 per year (40% of £12,000 annual gifts)

How to Do It Right

  1. Establish a pattern — Set up a routine that works for you (monthly, quarterly, or annual gifts)
  2. Use current income — Ensure gifts come from your salary, pension, or other income earned in the same year
  3. Keep records — Document your income, normal expenditure, and gifts made
  4. Be realistic — Don't overstretch yourself; always retain enough to maintain your standard of living
  5. Be consistent — While you can pause if necessary, HMRC looks for a pattern of giving

Helpful Tip:

HMRC form IHT403 is used to claim this exemption after death. You can use this form as a template to record your gifts each year, making it easier for your executors later.

Common Misunderstandings

❌ "Any gift is tax-free"

Only gifts that genuinely come from surplus income qualify. Giving away savings or selling assets to make gifts would not count.

❌ "One-time gifts qualify"

HMRC looks for a pattern of giving. One-off gifts with no intention to repeat typically don't qualify.

❌ "I don't need to keep records"

Documentation is crucial. Without evidence of your income and expenditure, your executors may struggle to claim the exemption.

The Bigger Picture

Using the "gifts out of regular income" exemption allows you to see your family benefit from your wealth during your lifetime while reducing any future inheritance tax liability. With proper planning and documentation, it's a powerful tool in your estate planning toolkit.

Important Notice

Getting this exemption right is crucial. HMRC scrutinizes these claims carefully, and incorrect implementation could result in unexpected tax liabilities for your beneficiaries.

This factsheet provides only a general overview of the "gifts out of regular income" exemption. Before establishing any regular gifting strategy, it is essential to consult with a qualified accountant or tax adviser who can:

  • Assess your specific financial situation
  • Help determine what constitutes "surplus income" in your case
  • Advise on appropriate record-keeping methods
  • Ensure your gifting strategy meets all HMRC requirements

Professional guidance will help safeguard your gifts and provide peace of mind that your inheritance tax planning is effective and compliant.

The information in this factsheet is based on our understanding of current legislation and HMRC practice as of the publication date. Tax laws and their interpretation may change over time.