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HMRC’s Inheritance Tax (IHT) receipts have only gone up in recent years, and this trend is set to continue.
Between April and December 2025, the government received £6.6 billion in IHT – a £200 million increase on the same period in the previous year. [1]
While the value of UK estates continues to rise, the IHT nil-rate band, under which no IHT is due after a death, has been frozen until 2031.
One underused IHT mitigation strategy is to gift funds from surplus income to beneficiaries during your lifetime. Despite it being an efficient way to pass on wealth, a Freedom of Information request to HMRC in 2025 revealed that only 2% of estates used the exemption when gifting in the previous three years. [2]
Gifting from income versus gifting from capital
If you make gifts from capital (savings, investments, or other assets aside from your pension), there is a tax-free annual gifting exemption of just £3,000, to be split among as many beneficiaries as you like.
There are additional exemptions for wedding and civil partnership gifting, and small gifts of £250 or less, but these are not generous enough for meaningful lifetime gifting in most cases.
Gifts valued above £3,000 will be counted as potentially exempt transfers (PETs) and may attract IHT if you pass away within seven years. So, while PETs could be a great way to reduce the value of your estate, if you pass away within the seven-year period, your estate may still be hit with a large IHT bill.
Alternatively, gifts from surplus income of any amount can be given entirely IHT-free.
“Surplus income” includes any unused funds from the following income streams:
- Salaried income
- Pension drawdown
- Rental properties
- Trusts
- Dividends
It is worth noting Investment income that is reinvested counts towards the tally, as does reinvested income from ISA holdings.
At its core, the gifting from surplus income rule implies that you’re receiving more than you need and wish for the excess to be passed down straight away. Rather than putting your surplus income back into your pension or another saving or investing vehicle, you’re choosing to remove it from your estate immediately.
As this way of reducing IHT is extremely advantageous when utilised correctly, HMRC places strict regulations on what counts as a gift from surplus income. The executor of your estate will need to be able to prove to HMRC that the gifts count as being “from surplus income” after your death – and any ambiguity around this could result in an IHT charge on the value of those gifts.
Here are three rules you can follow to help ensure your lifetime gifts remain IHT-free.
1. There must be a payment pattern
For a gift to be considered “normal”, there must be a pattern. Gifts made on a one-off basis, even if gifted from excess income, will be deemed to be a PET.
By contrast, payments made monthly or quarterly to the same recipient(s) are following a pattern. Regular gifting may help to keep the value of your estate in check over time while giving your loved ones a regular income boost.
Although not written in stone, a three- to four-year period would be considered the amount of time required to establish a pattern, although in some instances it can be established sooner.
2. Your standard of living must remain unaffected
Another crucial stipulation made by HMRC is the transferor must be able to maintain their usual standard of living after by making these regular gifts. This is where the word “surplus” comes into play.
The usual standard of living is assessed by what is normal for that individual at the time of making the gifts. Your habitual lifestyle being the marker, as opposed to an arbitrary benchmark.
3. Detailed record keeping is a must
When your executor is valuing your estate for IHT purposes, they need to be able to reliably prove that these gifts were made from surplus income.
It is important to document the gifts carefully, as an example, a simple letter signed by you and the recipient can serve as evidence of your intention to make regular gifts.
If gifts are made via online bank transfer, this will create a provable long-term pattern that HMRC will be able to recognise.
You should log every gift and keep a record of your expenditure from year to year.
The more meticulously you document the information required for gifts from surplus income, the greater the chance of reduced IHT later.
Our wealth planning team can help you make tax-efficient lifetime gifts
The experienced Wealth Planners at IPS Capital are here to ensure your estate plans are appropriate for your goals and, where possible, tax-efficient.
Contact your Relationship Manager to learn more – or if you do not already work with us, email info@ipscap.com for more information.
Please note
Please do not act based on anything you might read in this article.
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate tax planning or estate planning.
IPS Capital does not provide tax or legal advice.
Sources
[1] 22.01.2026 HMRC tax receipts and National Insurance contributions for the UK (monthly bulletin), Gov.uk
[2] 06.05.2025 Just 2% of estates use IHT mitigation rule when gifting FTAdviser
