Brits missing out on little-known inheritance tax relief on regular gifts

June 3, 2026

Nearly three quarters of UK adults (72%) do not realise that money regularly gifted from spare or excess income is immediately exempt from inheritance tax (IHT) calculations, new research from Canada Life reveals.

According to the data, nearly a third (31%) of gifts given by over‑55s in the last seven years were funded from surplus or spare regular income – suggesting many may already be using this valuable exemption without understanding it or keeping the records that HMRC requires.

John Chew, tax, trusts and estate planning expert at Canada Life explains why the ‘normal expenditure out of income’ rule remains one of the lesser‑known IHT exemptions and how families can use it to pass on wealth efficiently during their lifetime.

“With inheritance tax rules set to change from April 2027, more families are set to be caught in the IHT net and may be looking for strategies to manage their potential liabilities.

“For those fortunate enough to find themselves with surplus regular income that is not needed to cover living expenses, a powerful option is to gift that excess income regularly to loved ones.

“Under HMRC’s ‘normal expenditure out of income’ rules, any gifts that qualify as regular gifts from surplus income are immediately exempt from IHT. There is no need to survive seven years after making the gift, unlike many other forms of gifting.

“However, the exemption is relatively unknown and often underused because there are several strict conditions. The donor (or executors after death) must be able to evidence that all conditions are met. Without that evidence, HMRC may treat the gifts as potentially taxable.”

In simple terms, your gifts must meet the following three conditions to qualify:

Gifts must come from income, not capital

John: “The gifts should be funded from your net income, not by dipping into core capital such as savings or investments. This can include regular income you earn from sources such as pension income, interest dividends, or rental income after tax.”

Gifts must form a regular pattern

John: “Consistency is key. The gifts should be habitual and given on a regular basis. For example, a monthly bank transfer, or an annual gift each Christmas or birthday. One-off gifts are unlikely to qualify.”

Gifts should not compromise your standard of living.

John: “If the gifts given to loved ones result in you having to dip into your savings to pay the bills, then the exemption would not apply.”

John Chew’s tips for setting up a regular gifting plan

Assess your income and spending

John: “Start by totalling all sources of regular net income, this could be from pensions, dividends, interest or rental income. Then add up all your usual living expenses. The difference between these figures is the potential surplus income that could be gifted.”

Make it regular

John: “Once you have decided on the amount you wish to gift on a regular basis and to whom, it should be automated, for example via a standing order. This helps to demonstrate a clear pattern of gifting to HMRC. As an extra precaution, many advisers suggest writing a letter to the recipient (or to their solicitor) stating that these payments are part of a planned series of gifts out of surplus income.”

Importance of record keeping

John: “Because the claim for the ‘normal expenditure out of income’ exemption is usually made after death, clear records are essential. HMRC form IHT403 includes a schedule which may be used to log these gifts as they are made. Keeping copies of bank statements, letters and a simple schedule of gifts can make life much easier for executors.”

Take financial advice

John: “Gifting from surplus income can be a highly valuable exemption, but the rules can be complex. A financial adviser can help determine whether this approach is appropriate and ensure the strict conditions are met.”