Gifts Out of Income and Inheritance Tax: How Does the Exemption Work?

Most people know they can give away £3,000 a year without it being added to their estate when they die. Fewer know there's a second option too - one with no upper limit: gifting from your surplus income. At LDB Wealth, we find this exemption is often overlooked, even though it can shelter much larger sums from Inheritance Tax.

What makes this exemption different

Unlike the £3,000 annual exemption, gifting out of income has no fixed cap. What matters is that the gift is part of a regular pattern, paid from income rather than savings, and small enough that you can still afford your normal lifestyle afterwards. 

What this looks like in practice

For clients across Surrey, Kent and further afield, this often means:

• Regular school fee payments for grandchildren
• Monthly ISA contributions for a child
• Ongoing support for an elderly relative

Affordability matters most here. That means looking at what you have left after your usual household spending, tax bill and existing commitments, not before them. 

The seven-year rule does not always apply

One common misunderstanding is that you need to survive seven years after every gift for it to escape tax. Under the general rule, most gifts remain part of your estate for seven years after you make them, and only fall outside it once you've survived that long, with the tax due tapering down the closer you get to that point. Gifts made from surplus income work differently: they're exempt from the moment you make them, with no waiting period at all.

Why records matter so much

HM Revenue and Customs (HMRC) only checks whether the exemption applies after you die, and it's your executors who need to prove it. Trying to piece together years of gifting from memory is hard, if not impossible. Keeping clear records as you go of what you gave, when, to whom, and why, makes their job much easier and gives HMRC less reason to question the claim.

One-off gifts and capital withdrawals

Even an occasional or irregular gift can still be exempt from Inheritance Tax, as long as you can show you meant it to be the start of a pattern rather than a one-off payment. It's a different story if you fund the gift by withdrawing from savings or investments, rather than from income. These capital withdrawals are less clear-cut, so it's worth getting individual advice rather than relying on a general rule.

LDB Wealth has been guiding families across Weybridge, Dartford and the wider UK through estate and tax planning since 2014, and this exemption features regularly in our Inheritance Tax planning conversations. It also sits alongside our broader estate planning guidance, since gifting rarely works in isolation from your will and pension arrangements.

Get in touch with our team for help in building a gifting strategy that stands up to scrutiny.

Tax Planning, Estate Planning & Inheritance Tax Planning are not regulated by the Financial Conduct Authority.