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The exemption lets you make regular gifts from surplus income that fall outside your estate at once, with no seven-year wait. Its longer-term future is less certain, so the sensible position is to use it now and document every gift.
Key Takeaways
- The exemption sits in Section 21 of the Inheritance Tax Act 1984 and removes qualifying gifts from your estate at once.
- Three conditions apply: the gift is part of a regular pattern, made from income, and leaves you able to maintain your standard of living.
- There is no upper limit, so each exempt gift is capped only by your genuine surplus income.
- Your executors claim it after death on HMRC form IHT403, so detailed records of income and gifts are essential.
Can you still use the normal expenditure out of income exemption in 2026?
Yes. As of the 2026 to 2027 tax year, the exemption under Section 21 of the Inheritance Tax Act 1984 remains in full force with no cap despite earlier speculation that a lifetime gift cap might be introduced in the 2025 Autumn budget.
Inheritance tax receipts reached a record £8.2 billion in 2024 to 2025, according to HMRC, which is why reform felt likely. None of the rumoured gifting changes appeared. For a wider view of what falls into your estate, see what counts as part of your estate.
What are the conditions for the gifts out of income exemption?
Under Section 21 of the Inheritance Tax Act 1984, a gift qualifies if it forms part of your normal expenditure, is made out of income taking one year with another, and leaves you with enough income to maintain your usual standard of living. All conditions must be met.
Normal means usual or habitual. HMRC looks for a settled pattern of giving, a principle set in Bennett v IRC in 1995. No minimum number of years is fixed in law, though HMRC treats three to four years as reasonable evidence. A pattern can also begin with your first gift ideally a regular amount coming out at regular intervals, showing clear intention to continue. Amounts do not need to be identical, so gifts funded by dividends or school fees still qualify.
Gifts to a UK registered charity or a Community Amateur Sports Club (CASC) are exempt from inheritance tax. The local amateur sports club must be registered with HMRC to benefit from tax reliefs, including Gift Aid, where they meet the qualifying conditions.
Which income counts, and which does not, for the exemption?
Income means your earnings net of tax: salary, self-employment profits, rent, pensions, interest, and dividends. According to HMRC, pension drawdown income can qualify. Capital does not count, nor does the capital element of a purchased life annuity or a withdrawal from a single premium bond.
| Counts as income | Does not count (treated as capital) |
|---|---|
| Salary and self-employment profits | Savings and the proceeds of selling assets |
| Rental income from property | The capital element of a purchased life annuity |
| Pension income, including drawdown | Withdrawals from single premium investment bonds |
| Interest and dividends | Income left to accumulate for more than about two years |
An HMRC technical note published in 2026 confirmed the exemption can apply to gifts from pension withdrawals, and that the April 2027 pension changes do not alter the position for lifetime gifts. One trap: where an annuity and a life policy are set up as a back-to-back arrangement, the premiums are excluded under Section 21.
How long will the gifts out of income exemption last after the 2025 Budget?
No end date has been announced. The exemption survived the November 2025 Budget. Its longer-term future is less certain, because the government has reformed inheritance tax repeatedly and gifts from income have appeared on reform shortlists.
Recent Budgets show a clear direction of travel. business relief and agricultural relief are capped from April 2026. Pensions enter the estate from April 2027 under the Finance Act 2026, and frozen thresholds keep pulling more estates into the net.
Past reforms have generally applied from a future date rather than retrospectively. That is not certain to continue, but the conclusion is simple: treat the exemption as a use-it-now opportunity, build a documented pattern of giving while the rules are favourable, and review after each Budget.
Expert Perspective: what most people get wrong
Many people wait, assuming they need years of giving behind them first. That is the wrong way round. The rule rewards a documented intention from the very first gift. The real failure point is rarely eligibility. It is evidence. Because the claim is made by your executors after your death, the burden of proof falls on your estate. Without records of income, spending, and gifts, the IHT403 schedule cannot be completed, and the claim can fail.
At Bluebond, 19/20 of our clients legitimately pay zero inheritance tax. Disciplined use of exemptions like this one, supported by clear records, is a large part of why. Regular gifting also works alongside other structures, such as lifetime trusts rather than will trusts, as part of a single plan.
Bluebond supplies its clients with a legally verified template to declare the intentions of the gifts from the outset and that it meets all of the requirements.
A practical checklist before you start gifting from income
- Have you calculated your genuine surplus income for the year, net of tax and living costs?
- Can you commit to a regular pattern of gifts, rather than a single one-off payment?
- Are the gifts funded from income, not from savings or the sale of an asset?
- Are you recording every gift, plus your annual income and expenditure, in writing?
- Would your standard of living still hold up if your income fell in a future year?
What to Avoid
- Funding income gifts from capital or savings, which breaks the second condition.
- Making a single large gift and assuming it qualifies, with no evidence of an intended pattern.
- Leaving no records, so your executors cannot complete the IHT403 schedule after your death.
- Using a back-to-back annuity and life policy arrangement, excluded under Section 21.
- Giving away so much that you would rely on capital to live, which fails the standard-of-living test.
Frequently asked questions
IHT Basics & Strategies
Who claims the gifts out of income exemption, and when?
Your personal representatives claim it after your death, on the schedule in HMRC form IHT403. The burden of proof sits with your estate, which is why clear records of income, expenditure, and gifts matter so much.
Can the gifts be paid from pension income, and used alongside the £3,000 annual exemption?
Yes to both. Pension drawdown income can count, and an HMRC technical note published in 2026 confirms the April 2027 pension changes do not affect lifetime gifts. The exemption works separately from the £3,000 annual exemption, so you can use both in the same year.
How does the 7-year rule work for Inheritance Tax?
Any gift falls outside your estate if you survive seven years after making it. Taper Relief reduces the charge on gifts made 3-7 years before death. Gifts made from regular surplus income — not capital — are exempt immediately, regardless of the 7-year rule.
Where this leaves you
The exemption is one of the few inheritance tax tools that works at once, with no waiting period and no ceiling. It is intact for 2026 to 2027, but the direction of policy makes it wiser to act on a documented plan now than to assume it will last.
You should engage with a firm that can give you financial planning, tax advice, legal advice and accountancy advice under one client relationship, with regulated financial advice referred to our independent FCA-authorised partner firm and legal drafting handled by qualified solicitors employed within our business.
You should work with advisers who coordinate financial planning, tax advice and legal work under one client relationship — with clear disclosure of who is regulated for what. Bluebond Tax Planning Ltd provides tax planning and coordination only; any advice on your investments, personal pension or annuity is FCA-regulated and referred to our independent partner firm — no company in the Bluebond group is FCA-authorised or an SRA-authorised law firm. Individual outcomes depend on personal circumstances and cannot be guaranteed.
If you need any help or advice in this complex area please contact us. We will help you mitigate your inheritance tax.
To see how regular gifting fits your estate plan, join our free inheritance tax webinar, explore our inheritance tax planning expertise, or start with the IHT Mitigation Plan.
Primary sources: Section 21 IHTA 1984 | HMRC Manual IHTM14231 | HMRC form IHT403 | gov.uk gifts guide
Disclaimer. The information in this article is general in nature and does not constitute personal financial, tax, or legal advice. UK tax legislation changes frequently, and the specific application of any rule or strategy depends on individual circumstances. Figures, thresholds, and reliefs mentioned are correct as of the 2026 to 2027 tax year unless otherwise stated. Before acting on any information here, consult a qualified adviser who has reviewed your full situation. Bluebond Tax Planning provides personal recommendations only under a signed client agreement, following a full review. Bluebond Tax Planning operates under UK legal frameworks and recognised professional conduct standards. Tax planning and legal work are not FCA regulated.
