Care with Surplus Capital or Income Gifts to be IHT Free Immediately
Published / Last Updated on 07/03/2026
With frozen Nil Rate Band (NRB) for Inheritance tax (IHT) since 2009 and both NRB and Residence Nil Rate Band (RNRB) frozen until 2031, we are going to pay even more in inheritance taxes.
Add to this, the changes to and reductions in Agricultural and Business Property Relief and unused pension funds to be included in estates on death from April 2027, ever more record IHT receipts are going to be paid.
This video explains how the “normal expenditure out of income” exemption works for inheritance tax (IHT). It focuses on the essentials you need to know to use the exemption safely and effectively.
What the exemption allows
You can make regular gifts from your surplus income without them being counted for IHT. These gifts do not use your nil‑rate band and are immediately outside your estate.
To qualify, gifts must be:
- Regular – part of an ongoing pattern
- Affordable – made from surplus income, not capital
- Sustainable – they must not reduce your usual standard of living
What counts as a “regular” gift
A pattern is usually shown over three to four years, but shorter periods can work if there’s clear evidence of commitment (e.g., standing orders, regular premium payments).
Regularity does not require:
- The same recipient every year
- The same amount every year
- Gifts at fixed intervals
Amounts should be broadly similar. A very large one‑off gift may not qualify.
What counts as income
Income must be net income (after tax), not capital. It includes:
- Salary or pension income
- Interest, dividends, rental income
- ISA income if withdrawn
- Pension drawdown (including tax‑free cash) when taken regularly
- Watch:
Drawdown and IHT Gifts IHT on Pensions - Fixed Term Annuity
IHT Drawdown and Spend Pensions IHT Lose RNRB,
It does not include:
- Bond withdrawals (usually treated as capital)
- Pension drawdown (including tax‑free cash) when taken ad-hoc or as lump sums
- Income that has been reinvested or accumulated
- Income left unused for more than about two years (HMRC may treat this as capital)
Each spouse is assessed individually—you cannot pool income for joint gifts.
What counts as surplus income
Surplus income is what remains after your normal living expenses, such as:
- Mortgage or rent
- Utilities, council tax, insurance
- Travel, holidays, memberships
Large one‑off costs (e.g., a new kitchen) may not reduce your surplus.
Shared household expenses are usually split equally between spouses.
Your gifts must not reduce your usual standard of living. If you need to use capital to maintain your lifestyle, the exemption may not apply.
How the exemption is claimed
Gifts are not reported at the time you make them. The claim is made by your executors after your death using form IHT403, covering the previous seven years. See HMRC’s Gift Form IHT 403 – page 8 where records of income and expenses
https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf
Because of this, good record‑keeping is essential. Executors need clear evidence of:
- Your income
- Your spending
- The gifts you made
- How the gifts formed a regular pattern
Without good records, HMRC may reject the claim.
Key message
The exemption works best when gifts are regular, affordable, and clearly from surplus income. If HMRC rejects any part of the claim, that portion becomes a taxable gift, which may reduce the IHT allowances available to your estate.
