Inheritance tax receipts reached a record £8.5 billion in 2025/26, the latest in a run of record years. With income tax thresholds frozen and pensions expected to fall within the estate from April 2027, more families are likely to find themselves affected.
The seven-year rule is a familiar feature of inheritance tax planning, but there is another valuable exemption that can allow regular gifts to fall outside your estate immediately, with no upper limit. Known as normal expenditure out of income, it is a one form of inheritance tax relief available.
How the exemption works
Gifts that meet three conditions are typically free of inheritance tax as soon as they are made. There is no need to survive seven years and no cap on the amount.
• The gift forms part of your normal expenditure. In practice this means a regular pattern, such as a monthly standing order or an annual payment
• The gift is made from income rather than capital
• After making the gift you still have enough income to maintain your usual standard of living
All three must be met. HMRC considers the claim after death, when your executors complete form IHT403.
What counts as income
This is where the exemption is most often misunderstood.
Income generally includes salary, pension income, rental profits, dividends and interest. Income produced by investments held within an ISA can also count.
Some things that feel like income are treated as capital. Withdrawals of the money you have invested in an ISA, pension tax free cash and the capital element of a purchased annuity generally do not qualify. Income saved up over a long period may also come to be treated as capital.
Why it matters more from April 2027
From 6 April 2027 unused pension funds are expected to form part of the estate for inheritance tax. For some people that changes the logic of leaving a pension untouched.
Taxable income drawn from a pension is generally accepted as income for this exemption. Where that income is not needed for day to day living, it may be possible to draw it, pay income tax at your marginal rate and give the surplus away on a regular basis. Those gifts can fall outside the estate straight away. Left in the pension, the same money may face inheritance tax and, after age 75, income tax for your beneficiaries too.
What regular gifts can look like
The gifts can take many forms, for example:
• Contributions to a grandchild’s Junior ISA or pension
• Regular payments to adult children, perhaps towards a mortgage or school fees
• Premiums on a life insurance policy written in trust
• Regular payments into a trust for children or grandchildren
A single gift can sometimes qualify where there is clear evidence it was intended as the first of a series. Planning the pattern from the outset makes a claim considerably stronger.
Records are everything
Because the exemption is claimed after death, your executors will need to show HMRC that each condition was met. That is far easier when records were kept at the time.
A simple yearly schedule of income, normal spending and gifts goes a long way. HMRC’s form IHT403 includes a table in exactly this format, so keeping your own version each year can save your executors a great deal of work. Bank statements, standing orders and a short written note of your intentions all help.
Points to watch
• Your own security comes first. Gifts should not come at the expense of future needs such as care costs or the effect of inflation
• If you need to dip into savings to pay normal bills, the exemption may not apply
• A change in circumstances, such as a fall in income, may mean the pattern of gifts needs to change
• Large one-off gifts from capital are treated differently. These may fall under the seven year rule or other exemptions such as the £3,000 annual exemption
What you might look at
• Whether your estate is likely to face inheritance tax, including your pension from April 2027
• Whether your regular income is higher than what you spend
• Whether any regular gifts you already make are written down
• How your executors would find the records they nee
Frequently asked questions
Is there a limit on how much I can give?
No. Provided the conditions are met, there is no monetary limit. The amount depends on how much surplus income you have.
Do I have to survive seven years?
No. Gifts that qualify are exempt immediately as per the above. Gifts that do not qualify may still fall within the seven year rule.
Can I use my pension tax free cash?
Generally not. Tax free cash is treated as capital. Regular taxable income drawn from a pension is generally accepted as income.
Can I make gifts from my ISA?
Income produced within an ISA can count. Withdrawals of the money you originally invested are treated as capital.
What records should I keep?
A yearly summary of income, normal spending and gifts, together with bank statements. Following the layout of HMRC form IHT403 makes the job easier for your executors.
Speak to us
Reybridge Capital is an independent financial planning firm working with clients across Wiltshire, Bath, the wider South West and London. If you would like to talk through whether regular gifting from surplus income could form part of your plans, please do get in touch.
RISK WARNING
The content of this document is intended for general information purposes only. The content should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
While we believe this interpretation to be correct, it cannot be guaranteed, and we cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained within this summary. Please obtain professional advice before entering into or altering any arrangement.
Reybridge Capital Limited, an appointed representative of Corbel Partners Limited who are authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered Office is 1 Queen Square, Bath, BA1 2HA. Registered Number: 10832082
The Financial Conduct Authority does not regulate inheritance tax planning.
The value of investments and income from them can fluctuate (this may partially be the result of exchange rate fluctuations) and investors may get back less than the amount invested. The information contained within this blog was correct as of 23 October 2026.
