Nick Mendoza
- Partner
- Private Client
Unlocking the power of gifts out of surplus income
With the Inheritance Tax (“IHT”) nil rate band allowance being frozen at £325,000 until at least 2030, and many more estates becoming liable to IHT as a result, there is a growing demand for tax efficient ways to pass assets down to the next generation. One option is to make gifts from surplus income, which, if done correctly, can mean that they are not subject to the usual seven -year gifting rules and are not taxable on death.
What is “surplus income”?
Surplus income is what is left over after deducting an individual’s normal expenditure from their annual after tax income. Normal expenditure is very specific to an individual’s circumstances; ‘normal’ is what is standard and habitual for a particular person.
In order to qualify for this exemption, it is crucial that any gifts are made from income that is truly surplus and do not leave the donor with insufficient funds to maintain their usual standing of living. The gifts themselves must also be regular in nature and so a pattern of giving needs to be evidenced. It is income alone that is considered – this exemption cannot be claimed where a donor is using capital to fund the gifts.
Claiming gifts out of surplus income
The validity of a claim for gifts out of surplus income is only determined upon death (unless the gift is made into trust) and so it is therefore essential that a donor keeps a comprehensive record of their annual income and expenditure.
With some careful planning, the gifts from surplus income exemption can be an invaluable succession planning tool. The types of gifts that can make use of this exemption include grandchildren’s school fees, university living costs or even life insurance premiums.
Gifting out of surplus income in practice
If you are thinking about gifting out of surplus income:
- Firstly, you should consider your annual income and outgoings and keep a record of this year on year.
- You should determine the amount you can gift whilst maintaining your usual standard of living.
- It is advisable to document the gifts in writing and set out your intention to make these regularly from your surplus income.
Speculation about the Autumn 2025 budget is mounting and with the Chancellor intent on meeting her self-imposed borrowing rules and fulfilling election promises, this generous exemption could be vulnerable. While any legislative changes are unlikely to be retrospective, taking advice now is recommended if you are considering this option.
For further information on this, or any other succession planning topic, please do contact your usual Wedlake Bell adviser.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
Meet the team:
Emily-Jane Lee
- Associate
- Private Client
