How to Gift from Excess Income to Address Inheritance Tax

At Stephen Eve Financial Planning, we believe inheritance tax (IHT) planning shouldn’t be complicated — especially when it can be done in a practical, tax-efficient way, without impacting your lifestyle. Estate planning made simple — with your lifestyle and loved ones front and centre.

💼 Why Inheritance Tax matters

Inheritance tax isn’t just something that affects the wealthy anymore. With property prices continuing to rise — and IHT thresholds frozen for years — more and more families are being pulled into the tax net.

To add to that, the Autumn Budget confirmed that pension wealth will be included in the scope of IHT from April 2027. For many people, this means even more of their estate could be liable for tax unless proactive planning is in place.

That’s why now is the time to consider your options — especially if you’re already drawing income you don’t fully need.

💡 Why this matters now

As you approach or enter retirement, you might find yourself with more income than you need for day-to-day living. That extra cash — whether from pensions, investments, or rental income — can be used to make regular gifts without affecting your standard of living.

🎯 What “excess income” means here

When you consistently spend less than you earn, that difference is your “excess income.” It’s the money flowing in, not touching your essential expenses — and it could be working harder for your estate planning.

🎁 How gifting reduces your estate’s IHT bill

Making a gift can reduce the overall value of your estate — and in turn, lower the amount of inheritance tax payable when you die. Some gifts, like those made from excess income or within your annual allowance, are immediately exempt from IHT.

For other types of gifts (such as one-off lump sums), you’ll usually need to survive for seven years for the full tax-saving benefit to apply. That’s why structuring your giving early — and with the right guidance — can make a real difference.

📊 A quick look at IHT exemptions

There are several ways to make gifts that reduce the value of your estate for inheritance tax purposes — but not all exemptions are created equal. Some are capped at fixed amounts (many unchanged for decades), while others offer much more flexibility.

Here’s a quick summary of the most common exemptions and their current limits:

As you can see, most exemptions have set monetary limits — and some haven’t changed in over 40 years. That’s what makes the ‘normal expenditure out of income’ rule so valuable: it’s uncapped, immediate, and highly effective when used correctly.

🔍 The inheritance tax benefit

Many inheritance tax exemptions come with fixed monetary limits — and unfortunately, those limits haven’t kept pace with inflation. Take the annual gift allowance, for example: you can give away up to £3,000 per tax year without it affecting your estate, but that figure has stayed the same since 1981. Naturally, that means it doesn’t stretch as far today.

But there’s one exemption that continues to offer real value — especially for those with surplus income: the ‘normal expenditure out of income’ rule. This allows you to make immediate and unlimited gifts from your income, provided a few key conditions are met.

To qualify, the gifts must:

1. Come from your income (not capital)
2. Form part of a regular pattern (monthly, quarterly, annually)
3. Not reduce your ability to maintain your usual lifestyle

When those boxes are ticked, these gifts are immediately exempt from IHT — no need to survive seven years. For many clients, it’s one of the most powerful, underused tools in estate planning.

👪 Common ways our clients use this

We’ve guided clients to use this approach in accessible ways, such as:

• Automatic payments into grandchildren’s Junior ISAs
• Regular contributions to grandchildren’s school or university fees
• Ongoing support toward adult children's mortgage or rent

These methods gradually reduce your taxable estate while supporting the next generation in real time.

📝 Why proper documentation is critical

To ensure HMRC recognises these gifts as exempt, we work with clients to:

• Keep clear income vs spending records
• Log each gift’s date, amount, and recipient
• Write a short note confirming the intention and expected frequency of the gifts

We also help your executors if ever required, making the transition smoother.

🗝 Advice is key

Lifetime gifting can be a powerful part of your inheritance tax strategy — especially when you use the ‘normal expenditure out of income’ exemption correctly.

A knowledgeable financial adviser will help you plan your gifts carefully to:

• Comply with HMRC’s rules
• Maximise your IHT savings
• Ensure you always have enough income to maintain your lifestyle

At Stephen Eve Financial Planning, we work closely with clients to develop plans that feel right for them — both financially and personally.