According to a Citywire report, forecasts from the Office for Budget Responsibility (OBR) suggest the amount of Inheritance Tax (IHT) paid to HMRC even with allowances such as the gifts from income inheritance tax exemption available, will have increased by 11.6% in 2024/25 compared to 2023/24.
This would bring the total amount of IHT collected by HMRC to a record-breaking £8.4 billion — the highest on record.
According to the report, this sharp increase is largely driven by two key factors: the prolonged freeze on the IHT threshold and the rising value of assets such as property and investments.
With the current thresholds frozen until at least 2030, more families are being pulled into the IHT bracket. This underlines the growing importance of effective estate planning, including HMRC-recognised reliefs like the gifts from income inheritance tax exemption to help reduce the tax burden passed on to beneficiaries.
There are a number of practical ways to limit your IHT liability, many of which are straightforward when planned in advance. One such approach often overlooked is making gifts from surplus income, which can qualify for inheritance tax exemption if certain criteria are met.
In this article, we’ll explore how this specific exemption works and how it can help ensure that more of your estate is passed on to your loved ones, rather than being claimed by HMRC.
Gifting assets is an effective way to reduce your IHT liability
One of the most effective ways to reduce your Inheritance Tax (IHT) exposure is by gifting assets during your lifetime.
For the 2025/26 tax year, IHT is charged at 40% on the portion of your estate that exceeds the standard £325,000 threshold — commonly referred to as the nil-rate band.
If your main home is passed on to a direct descendant, your available tax-free allowance could rise to £500,000.
It’s also worth noting that these thresholds apply per individual, which means that married couples or civil partners can potentially pass on up to £1 million tax-free.
By giving away certain assets, such as cash, investments or valuables while you’re still alive, you can effectively reduce the size of your taxable estate, helping to lessen or even eliminate any future IHT liability.
There are three main tax-free gifting allowances you can take advantage of each year:
- Annual exemption of £3,000 – You can give away up to £3,000 in total each tax year without it counting towards your estate for Inheritance Tax purposes. This amount can be split between multiple people. If you didn’t use this allowance the previous year, you can carry it forward once, meaning a couple could jointly gift up to £12,000 immediately if no gifts were made the year before.
- Wedding or civil partnership gifts – You can gift up to £5,000 to a child getting married, £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else. These wedding gifts are exempt from IHT and are in addition to your annual £3,000 exemption.
- Small gifts of £250 or less – You can also give as many small gifts of up to £250 per person as you like, provided the recipient hasn’t already received a gift from one of the other exemptions listed above.
If you go beyond these allowances, most other gifts will fall under what’s known as Potentially Exempt Transfers (PETs) and may still be subject to Inheritance Tax, depending on when the gift was made and how long you live after giving it.
If you survive for seven years after making a Potentially Exempt Transfer (PET), the gift becomes fully exempt from Inheritance Tax. However, if you pass away within that seven-year window, the gift may still be subject to tax — though the amount owed could be reduced thanks to a system known as taper relief, which decreases the tax due the longer you live after giving the gift.
In addition to annual exemptions and PETs, another valuable yet often underused strategy is the “gifts from surplus income” rule. This approach can be a highly effective way to minimise your estate’s IHT liability — especially when used consistently over time.
Gifts out of income are usually Inheritance Tax-free
Using your regular income to make gifts is a powerful estate planning tool. These gifts are usually free from Inheritance Tax, and they also allow you to provide meaningful financial support to your loved ones during your lifetime.
There’s no set upper limit on how much you can gift under this rule but to qualify for the exemption, you must meet three key criteria:
- The gifts must come from income, not capital – You need to show that the money is drawn from your regular income (such as a salary or pension), rather than from savings or other assets you’ve accumulated.
- The gifts must be part of a regular pattern – They should be made consistently over time, not as one-off payments.
- Your own standard of living must not be affected – The income you use for gifting must be surplus to your everyday needs. You must be able to maintain your usual lifestyle without relying on capital.
While this method of gifting can be very effective, it’s important to think carefully about your broader financial situation. Giving away too much, even if it qualifies for exemption, could affect your future plans — such as funding care costs or moving home later in life.
You will need to review your own arrangements to confirm that the gifts you make are affordable when set against your other priorities, and that you are not creating future problems for yourself if the money you are gifting could be better allocated for other uses.
For example, you might be better off setting money aside for future care provision or to cover moving costs if you intend to downsize to a smaller property.
You should also carefully consider how any gifts of this kind will be used. Earmarking these for a specific purpose can often be advantageous. This could include paying annual school fees for your grandchildren, or putting regular amounts into a Junior ISA, which they can then access when they are 18.
Keep thorough records of gifts from income for Inheritance Tax purposes
When it comes to reducing your estate’s exposure to Inheritance Tax, keeping detailed records of any gifts you make is essential especially if you’re making gifts from income as part of your estate planning strategy.
Whether your gifts fall within the annual exemption, qualify as Potentially Exempt Transfers (PETs), or are made under the gifts from income inheritance tax exemption, maintaining accurate documentation is key. HMRC may request this evidence when your estate is assessed, particularly in the case of ongoing gifts from surplus income.
By clearly recording the source, amount, and purpose of each gift, you can help ensure that your beneficiaries receive their inheritance without delays during probate — and that your use of the gifts from income inheritance tax exemption is accepted without question.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning or estate planning.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
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