Gifting Surplus Income: A Smart Strategy to Reduce Inheritance Tax
With inheritance tax (IHT) rules changing and further reforms expected, it’s a good time to think about how to make your wealth work for you — and for the people you care about.
From April 2027, pensions are set to come within the scope of IHT, and there’s ongoing talk about changes to thresholds and gifting allowances in future Budgets. So, reviewing your estate planning strategy now could help you stay one step ahead.
Many people find they have more income in retirement than they actually need to live comfortably. Rather than letting that money build up in your estate — where it could later be taxed at up to 40% — one effective strategy is to gift some of your surplus income regularly to family or loved ones.
This approach can reduce the eventual tax bill on your estate and allow you to see your money making a difference during your lifetime — perhaps helping a child onto the property ladder, contributing to grandchildren’s school fees, or simply providing extra financial breathing space.
Why gifting surplus income matters
Under HMRC rules, there’s a little-known exemption called “normal expenditure out of income”.
This means that if you regularly gift money from your income — not your savings — those gifts are immediately exempt from inheritance tax.
That’s different from one-off gifts of capital, which usually only become tax-free if you survive for seven years after making them. Regular gifts from surplus income are free from IHT right away, as long as they meet a few simple conditions.
The three key rules
- To qualify for this exemption, your gifts must:
- Come from income, not savings or investments. The money should come from regular income sources such as pensions, dividends, interest, or rental income.
- Be part of a normal pattern. HMRC wants to see that the gifts are habitual — for example, a monthly transfer to children or an annual payment for grandchildren’s school fees.
- Not affect your standard of living. You must have enough income left over after gifting to maintain your usual lifestyle without dipping into your savings.
As long as these conditions are met, the gifts are exempt from inheritance tax straight away – and there’s no need to worry about surviving seven years.
The benefits of gifting from surplus income
Regular gifting can be a real win-win:
- You reduce the size of your taxable estate, potentially saving your family a large IHT bill in future.
- You help loved ones today, when the support might make the biggest difference.
- You stay fully compliant with HMRC rules through a transparent, well-documented approach.
In a world of changing tax rules and uncertain markets, gifting surplus income offers both peace of mind and a tangible way to pass wealth efficiently.
If you’d like to explore how this could work in your circumstances, your financial adviser can help you design a sustainable, compliant gifting plan that fits your needs and supports the next generation.
For more information about Inheritance Tax, please download our guide: Untangling Inheritance Tax.