How making gifts out of income can be a smart tool for saving inheritance tax
Many people have heard of the £3,000 annual gifting exemption for inheritance tax, but far fewer know about the more generous, and often overlooked, exemption for making regular gifts out of income.
If you’ve never heard of it, you’re not alone. Yet this allowance can make a huge difference to the inheritance tax bill your loved ones might face one day.
What are “gifts out of income”?
In simple terms, they are regular gifts you make as part of your normal expenditure from your surplus income, not from your savings or assets.
If the gifts meet the criteria, then they are exempt from inheritance tax, no matter how big they are.
Using this exemption wisely means you could give away thousands of pounds a year without it affecting the inheritance tax payable on your estate when you die.
What counts as income?
HMRC looks at your normal, ongoing income (after tax), which can include:
- Salary
- Pension income
- Rental income
- Dividends
- Interest
- Bonuses
- Certain benefits
The key is that the money comes from what you’ve earned, not savings or other assets.
What gifts qualify for the exemption?
To qualify, the gifts you make must satisfy the following conditions:
- Normal expenditure
HMRC wants to see a regular pattern of gifts as part of your normal spending – monthly, quarterly, or annual gifts all work.
- Made out of income
The gift must be made from income, not capital. If you dip into your savings, investments, or property, the gifts won’t be exempt.
- Standard of living
After making the gifts you must still have enough income left to maintain your usual standard of living i.e. you must still have the money you need for bills, food, and other essentials.
If you meet these conditions, and the gifts do not fall within any of the exceptions, the gifts are exempt immediately; you do not need to survive seven years for them to fall out of your estate for inheritance tax purposes.
The types of gifts that might qualify include:
- Paying a grandchild’s school fees every term
- Contributing monthly to a child’s rent
- Funding a family member’s ISA each year
- Regular donations to charity
- Annual birthday or Christmas gifts of a consistent amount
The amounts can be surprisingly large as long as they’re affordable from your income and can be combined with most other allowances if you’re making gifts to the same person.
Why this exemption is so important
Most people assume they’re limited to the £3,000 annual exemption. But gifts out of income can be far more generous, especially for retirees with good pensions or people with strong investment income.
Used well, this allowance can:
- Reduce the size of your taxable estate
- Help loved ones when they need it most
- Avoid the seven‑year rule entirely
- Pass on wealth gradually and sensibly
It’s one of the most flexible tools in inheritance tax planning.
How to prove your gifts qualify
HMRC doesn’t require you to apply in advance, but good record‑keeping is essential. Your executors will need to show:
- Your income for each year
- Your regular expenditure
- The pattern of gifts
- That you had enough income left over
A simple spreadsheet or annual letter can make life much easier later.
Final thoughts
Gifts out of income are a brilliant way to support family, reduce inheritance tax, and pass on wealth while you’re still around to see the benefits. Yet so many people miss out simply because they’ve never heard of the allowance.
It’s easy to make mistakes with gifting and getting advice from a specialist is recommended. If you have questions about inheritance tax and planning for your loved ones after your death, you can contact an Accredited Lifetime Lawyer using the “Find a Lawyer” service here: https://lifetimelawyers.org.uk/Public/Public/Radius-Search/Find-a-Lawyer.aspx