Gifts out of income: how regular gifts can be free of Inheritance Tax
Many people like to help children or grandchildren during their lifetime. They might pay into a savings account each month, cover school costs or help with rent. Most people have heard of the seven-year rule for gifts. Fewer know about a different exemption that can apply straight away: gifts made out of normal income.
This article explains the idea. It is general information, not tax advice.
How gifts usually work for Inheritance Tax
GOV.UK explains that no tax is due on gifts if you live for seven years after giving them. If you die within seven years, some gifts may count towards your estate. Gifts made between three and seven years before death may get taper relief, which reduces the tax on that gift.
There are also some yearly exemptions. At the time of writing (October 2026), GOV.UK lists:
- an annual exemption of £3,000 of gifts each tax year, with any unused amount carried forward for one year only
- small gifts of up to £250 per person, as long as no other allowance has been used for that person
- wedding or civil partnership gifts of up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else
You can read the full rules on GOV.UK’s page about rules on giving gifts.
What is the “gifts out of income” exemption?
The exemption for normal expenditure out of income is different. GOV.UK says regular payments can be exempt if:
- you can afford them after meeting your usual living costs
- you pay them from your regular income
There is no set limit on how much you can give this way. If the gifts qualify, they are exempt straight away. The seven-year rule does not apply to them.
The three key tests in plain English
1. The gifts come from income, not capital
Income includes things like salary, pension income, rental income, and interest or dividends. Capital means savings, investments or the proceeds of selling something. Gifts paid from savings will not usually qualify.
2. The gifts are regular
HMRC looks for a pattern. Monthly payments into a child’s savings account, or yearly payments towards school fees, are common examples. A single one-off gift is less likely to qualify, although a clear plan to make regular gifts can help.
3. You can still afford your normal lifestyle
After making the gifts, you must still have enough income to maintain your usual standard of living. If you have to dip into savings to pay your bills because of the gifts, the exemption may not apply.
Why records matter so much
The exemption is not claimed when you make the gift. It is usually claimed by your executors after you die, when they report the estate to HMRC. By then, you will not be able to explain your finances. Good records can make the difference.
Helpful records include:
- a simple yearly note of your income
- a summary of your usual spending
- a list of each gift, the date, the amount and who received it
- a short letter explaining that you intend to make regular gifts from surplus income
Many people keep a spreadsheet updated once a year. Store it with your Will papers so your executors can find it.
Examples of gifts that may qualify
- paying a set amount into a grandchild’s savings account each month
- paying regular premiums on a life insurance policy for someone else
- contributing to a child’s rent or living costs on a regular basis
Whether a gift qualifies depends on the facts. These examples are only illustrations.
Why this may matter more from 2027
From 6 April 2027, most unused pension funds are due to be counted as part of an estate for Inheritance Tax. Some people are reviewing how they use pension income and other income as a result. Regular gifts from surplus income may be one of several things to discuss with a professional.
Common pitfalls
- making gifts from savings and assuming they count as income
- giving irregular or one-off amounts
- gifts that leave you short of money for your own needs
- no records, leaving executors unable to prove the pattern
- forgetting that gifts can affect other plans, such as care costs
How executors deal with gifts
When someone dies, their executors need to report certain gifts made in the seven years before death. GOV.UK has guidance on how to work out Inheritance Tax due on gifts. Clear records make this much easier.
Where to go from here
To understand the wider picture, read our help article on how Inheritance Tax works, and our overview of what estate planning includes.
If you would like to discuss gifting with a qualified professional, you can learn about estate planning introductions. WillHarbour is an introduction service and does not give tax advice. Using our service is free, and there is no obligation to instruct anyone.
Frequently asked questions
Is there a limit on gifts out of income?
GOV.UK says there is no set limit, as long as the gifts are regular, come from your income and leave you able to meet your usual living costs.
Do gifts out of income have to survive the seven-year rule?
No. If the gifts qualify for the normal expenditure out of income exemption, they are exempt straight away.
How do my executors prove the gifts were from income?
Clear records help. Keep a note of your income, your usual spending and each gift you make, and store it where your executors can find it.
This article is general information about the law in England and Wales and isn’t legal, tax or financial advice. Rules can change, so check official guidance or speak to a qualified professional about your situation.
