Utilising the Gifts out of Surplus Income Rule to Reduce Inheritance Tax
As a department, we are often asked how we can help our clients reduce inheritance tax liabilities. Interestingly, HM Revenue & Customs (HMRC) has recently revealed that only 2% of estates (around 1490 in three years) have utilised the valuable Gifts Out of Surplus Income tax break.
What is the Gifting Out of Surplus Income?
The Gifts Out of Surplus Income rule is a little-known exemption which allows you to avoid the seven-year survivorship rule for making gifts. The rule means that if you can prove that you made regular payments out of your income, and making those payments does not have a negative effect on your standard of living or normal finances, then that money is exempt from inheritance tax (IHT). You need to demonstrate that the gifts came out of income and not capital. If your gift comes out of income and you then have to dip into capital to meet your normal living expenses, then the exemption won’t apply.
How does the Gifts out of Surplus Income rule work in practice?
As mentioned above, the gifts must come out of a type of income, which could be from employment, pensions or dividends.
It’s important to note that the gifts must also be habitual. HMRC will check to see if these are routine payments. The savings for this could be considerable.
For example, if you were able to give away £10,000 of unused income each year for seven years, used towards your children’s mortgage repayments or grandchildren’s education costs, then you will have passed over £70,000 and reduced inheritance tax liabilities by £28,000. You will have done all this, yet still have the benefit of full IHT allowances.
Why is the Gifts out of Surplus Income rule so important?
Current inheritance tax allowances of £325,000, plus a £175,000 allowance for your home, have been fixed until April 2028. This means that as house values and wages increase, more and more people will be caught by the inheritance tax. The Gifts Out of Surplus Income allowance is, therefore, a useful tool in the tax planning toolbox, allowing individuals to reduce inheritance tax liabilities greatly.
Are there other ways to reduce inheritance tax?
Inheritance tax is a complex area, and you need to be aware of many different aspects, such as the various reliefs available (e.g. business and agricultural reliefs), the use of trusts, transferable assets, possible allowances and also lifetime gifts. This is in addition to the Gifts Out of Surplus Income allowance detailed here.
This area of the law is also undergoing significant changes over the next 12 months. You can view our recent article about inheritance tax changes in 2026 here.
If you need comprehensive inheritance tax advice and are proactively looking at ways to reduce your tax liabilities, then GA Solicitors’ specialist wills, trusts and probate team can help. We have a number of specialist tax planning advisors who can help to manage your estate to best effect and advise on aspects such as Gifts out of Surplus Income. We are also ranked in The Legal 500 and Chambers High Net Worth so you can be assured you are in the best possible hands.
Call GA Solicitors in Plymouth today on 01752 203500 or email enquiries@GAsolicitors.com to see how we can help.
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