UK households are being urged to take action with a little-known tax exemption saving them cash before a rule change in April 2027. Chancellor of the Exchequer Rachel Reeves confirmed reformations to the inheritance tax system will come into force from next year. Changes to how unused pension pots are treated by the taxation system will begin from April 2027.
But an unknown HMRC tax exemption can save you money before the rule change is enforced. Data from Canada Life found that 72% of UK adults do not know that regular gifts made from surplus income can fall outside inheritance tax calculations altogether. Many families may be eligible for tax relief without even realising.
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.
“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.”
There are three specific criteria those wishing to make a gift must meet, GB News reported. Chew outlined the details of the criteria, and noted that the gifted cash should come from a specific source of your income.
He said: “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.
“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.”
HMRC form IHT403 provides a schedule for logging gifts as they occur, while retaining bank statements and correspondence simplifies matters for executors. Chew noted that financial guidance is “advisable” for those wondering how to give financial gifts.