Britons can give away unlimited amounts of money from their spare income without paying inheritance tax, as long as strict rules are followed.
This little-known allowance lets people pass on money from their extra earnings without being hit by the 40 per cent inheritance tax that usually applies to estates above the threshold.
To qualify, the gifts must come from income rather than savings or assets, be given on a regular basis, and not reduce the donor’s standard of living.
Surplus income is what’s left after everyday expenses and can include wages, pensions, interest, ISA returns, dividends or rental income.
Around 23 per cet of people plan to give away money to reduce their inheritance tax bill, research by Hargreaves Lansdown found. The findings follow the Government’s decision to include pensions in inheritance tax calculations from April 2027.
Nearly one-third of participants (32 per cent) remained uncertain about their approach to managing potential tax liabilities. The inclusion of pension assets in inheritance tax calculations has sparked widespread concern, as retirement funds often represent substantial portions of individual wealth.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, noted that "pensions can be one of our biggest assets and so we will see more people facing inheritance tax in the years to come."
For gifts to qualify under the surplus income exemption, three conditions must be met:
- The money must come from income, not from savings or assets.
- The gifts must be made on a regular basis, as part of normal spending.
- The payments must not reduce your standard of living.
Britons can gift unlimited amounts tax-free ahead of pensions tax raid
| GETTYStevie Heafford, tax partner at HW Fisher emphasises these criteria must all be met for the exemption to apply. Individuals commonly establish automated bank transfers to ensure regularity of payments.
In addition to the surplus income exemption, there are other ways to give money without paying inheritance tax.
Individuals can gift up to £3,000 each year tax-free, and if the allowance is not used in one year, it can be carried over to the next.
Wedding gifts of up to £5,000 are also permitted, depending on the relationship to the couple, and small gifts under £250 per person remain exempt.
Inheritance tax can be reduced by giving gifts - but rules do apply | GETTYResearch indicates that eighteen per cent of people plan to increase their spending in order to reduce the size of their estate and avoid inheritance tax charges. A further eight per cent are considering transferring ownership of their homes to relatives.
Experts warn that these are major financial commitments which could have lasting consequences for retirement security. The findings suggest that forthcoming changes to pension taxation are prompting many households to rethink how they pass on their wealth.
The range of responses demonstrates the uncertainty many face when confronting potential inheritance tax obligations, with different individuals favouring either asset reduction through spending or direct property transfers to beneficiaries.
Financial planning experts caution against rushed decisions that could jeopardise retirement security
| GETTYFinancial planning experts caution against rushed decisions that could jeopardise retirement security.
Ms Morrissey warned: "None of us know how long we are going to live or what the future may hold. With this in mind, it is vital that you don't overspend or give too much money away as there's a chance you could do too much and leave yourself struggling later on."
Property transfers require particular scrutiny, as continuing to reside rent-free in a gifted home could still trigger inheritance tax charges.
Maintaining detailed records proves essential, especially for surplus income gifts where families must demonstrate compliance with regulations. Professional financial guidance remains advisable to ensure proper understanding of complex rules.