Britons are being urged to take advantage of a little-known inheritance tax exemption that allows unlimited amounts to be gifted tax-free.
The relief could become increasingly valuable ahead of major inheritance tax changes from April 2027, when unused pension pots are due to be brought into many estates for inheritance tax purposes.
However, new research suggests most people are unaware the exemption even exists. Data from Canada Life found that 72 per cent of UK adults do not know that regular gifts made from surplus income can fall outside inheritance tax calculations altogether.
The findings indicate many families may already be using the relief without realising it. Nearly a third of gifts made by people aged 55 and over during the past seven years came from spare income, yet many donors and recipients fail to keep the records HMRC requires to prove the exemption applies.
Known as the "normal expenditure out of income" exemption, the relief allows people to make regular gifts from excess income without triggering inheritance tax liabilities, provided certain conditions are met.
Unlike many other gifting strategies, there is no requirement for the donor to survive for seven years before the gift becomes exempt from inheritance tax.
John Chew, tax, trusts and estate planning expert at Canada Life, said: "Under HMRC's 'normal expenditure out of income' rules, any gifts that qualify as regular gifts from surplus income are immediately exempt from IHT.
"There is no need to survive seven years after making the gift, unlike many other forms of gifting."
The exemption is expected to attract greater attention as families prepare for inheritance tax changes due to take effect from April 2027, which will bring many unused pension funds into the inheritance tax net for the first time.
Despite this advantage, the relief remains significantly underutilised. Mr Chew explained that strict conditions and evidential requirements contribute to its obscurity.
Families warned inheritance tax bills could jump by £34,000 under pension crackdown | GETTY"However, the exemption is relatively unknown and often underused because there are several strict conditions. The donor (or executors after death) must be able to evidence that all conditions are met. Without that evidence, HMRC may treat the gifts as potentially taxable."
To qualify for this exemption, gifts must satisfy three specific criteria set out by HMRC.
First, the money must originate from income rather than capital. Mr Chew noted: "The gifts should be funded from your net income, not by dipping into core capital such as savings or investments.
This can include regular income you earn from sources such as pension income, interest dividends, or rental income after tax."
The standard Inheritance Tax rate is 40% | GETTYSecond, the transfers must demonstrate a consistent pattern over time. "Consistency is key. The gifts should be habitual and given on a regular basis.
For example, a monthly bank transfer, or an annual gift each Christmas or birthday. One-off gifts are unlikely to qualify," Mr Chew explained.
Third, making these gifts must not force the donor to draw on their savings for everyday expenses. "If the gifts given to loved ones result in you having to dip into your savings to pay the bills, then the exemption would not apply," he added.
For those considering this approach, Mr Chew recommends beginning by calculating total net income from all sources, including pensions, dividends, interest and rental payments, then subtracting regular living costs to identify the available surplus.
Relatives must trace and record increasingly modest gifts made during the seven years before a death when completing inheritance tax returns | GETTYAutomation helps establish the required pattern of regularity. "Once you have decided on the amount you wish to gift on a regular basis and to whom, it should be automated, for example via a standing order.
This helps to demonstrate a clear pattern of gifting to HMRC," Mr Chew advised.
Documentation proves essential since claims typically arise after the donor's death. HMRC form IHT403 provides a schedule for logging gifts as they occur, while retaining bank statements and correspondence simplifies matters for executors.
Given the complexity of the rules, professional guidance is advisable. "A financial adviser can help determine whether this approach is appropriate and ensure the strict conditions are met," Chew concluded.