Legal News | 31.07.25
Gifts out of surplus income are on the rise
New data shows that families are turning to a lesser-known inheritance tax exemption, which involves making gifts out of ‘excess’ (or ‘surplus’) income. Historically, this has been an underutilised gift exemption, but new data suggests that the total value of gifts made out of excess income rose by 177% to £144 million in the tax year 2023/2024 (an increase from £52 million in the previous year).[1]
The ‘gifts out of excess income’ exemption is one of several IHT exemptions that are available only during lifetime. There is no limit to the exemption so long as the gifts are made from a person’s income, form part of their normal expenditure and leave them with enough income to maintain their usual standard of living (i.e. without drawing on capital). Where the conditions for the exemption are satisfied, the gifts will be immediately free of inheritance tax (unlike gifts of capital which are subject to a 7-year run-off period to avoid attracting any inheritance tax, although may be covered by a person’s £3,000 annual allowance). The exemption can be claimed not only on gifts of income to other individuals but also gifts of income into trust. Common gifts made under this exemption could, for example, include the payment of school or tuition fees for members of the family.
Such planning, however, must be implemented carefully and it is crucial that a regular pattern of gifting can be demonstrated. Drafting a letter as evidence of your intention to make such regular gifts of income is important, as well as keeping accurate records of the gifts made.
At least for now (and in the right circumstances), this exemption from inheritance tax can prove a very effective way of reducing an individual’s exposure to inheritance tax when they die. At Wansbroughs, our Private Client team are highly experienced in giving inheritance tax advice. Please do get in touch with the team to discuss your circumstances further
[1] New data shows IHT free gifts soar 177% as families race to dodge Reeves’ cuts to key IHT reliefs – IFA Magazine
