Gifts from surplus income: the records HMRC expects

What the exemption is

Its full name is the “normal expenditure out of income” exemption. In plain terms, gifts that are part of someone’s normal spending, and paid from income they did not need, are free of Inheritance Tax (IHT). IHT is the tax on the estate of someone who has died.

Two things make this exemption unusual. First, there is no set cash limit, unlike the £3,000 annual exemption (2026/27). Second, there is no seven-year wait. A gift that qualifies is outside the estate straight away. Our guide to gifts and the 7-year rule explains how other gifts are treated.

Typical examples are a monthly standing order to a grandchild’s savings account, regular help with a child’s rent, or paying a life insurance premium for someone else each year. The rules apply across the UK.

The giver does not claim this exemption. The executor claims it after the death, on HMRC form IHT403. By then the giver cannot explain anything, so the records have to do the explaining.

The three conditions

HMRC only allows the exemption if all three of these are true:

1. The gifts are part of a regular pattern. They form part of the giver’s normal spending. A pattern can be shown by repeated gifts of a similar size, such as a monthly payment, or by a clear plan made at the start, such as a signed note saying who will receive what, and how often.
2. The gifts come from income. Income here means money such as pensions, interest and dividends, after tax. Gifts paid from savings, or from selling an investment or a property, do not count.
3. The giver keeps their usual standard of living. After making the gifts, they still have enough income to live as they normally do, without dipping into savings.

The IHT403 income and expenditure table

Form IHT403 lists gifts made by the person who died. It has a section for this exemption, with a table of income and spending for the years in which the regular gifts were made. HMRC uses it to check that the gifts came out of surplus income. The table groups figures into rows like these.

Income

• salary or pension, after tax
• interest
• investments, such as dividends
• rents
• other income

Spending

• mortgage, insurance, household bills and Council Tax
• travel, entertainment and holidays
• nursing home fees
• other spending

The surplus for the year is income minus normal spending. Gifts claimed under this exemption need to fit within that surplus.

A simple example

In one tax year, a mother’s income after tax from her pensions and savings interest is £30,000. Her normal spending, including bills, food, travel and a holiday, is £24,000. That leaves a surplus of £6,000. Regular gifts of £500 a month to her grandson, £6,000 over the year, could fit within that surplus. If she gave £8,000 instead, the £2,000 above the surplus would need another exemption, such as the annual exemption, or would be treated as an ordinary gift under the seven-year rule.

Why years of records are needed

Gifts made in the seven years before death can affect the Inheritance Tax bill. So the executor may need to show income and spending for every year in which regular gifts were made in that period. That can mean up to seven tax years of figures, each running from 6 April to 5 April.

Claims often fail for reasons like these:

• there is a record of the gifts, but none of the giver’s spending
• the gifts look random in size or timing, so there is no clear pattern
• the gifts were paid from savings, or from the proceeds of selling something
• in some years spending was higher than income, so the giver was living partly on savings

Without records, HMRC may treat the gifts as ordinary gifts. They then count towards the estate if the giver died within seven years of making them.

When care starts

Care fees are part of normal spending, and nursing home fees have their own row in the IHT403 table. When fees begin, a surplus that existed for years can shrink or disappear. Gifts that carry on may then be coming from savings rather than income, and this exemption would not cover them. It is worth looking at the yearly figures again when care begins. Gifts made around the time care is needed can also matter to the council, which follows different rules. Our guide to deprivation of assets explains more.

How to keep the records

The aim is a set of yearly figures that someone else could check against evidence. In practice that means:

• keeping statements for every bank and savings account, for every year, on paper or downloaded
• keeping pension statements and tax documents that show income after tax
• noting interest and dividends for each tax year
• sorting spending into simple groups, such as household bills, insurance, travel and care fees
• recording each gift with its date, amount and recipient, and noting that it was meant to come from income
• writing a short, signed and dated note when a regular gift starts, saying who it is for, how much and how often
• noting any change in the giver’s standard of living, and why

Doing this once a year, soon after 5 April, is far easier than trying to rebuild seven years of figures after a death. If the giver is starting a large regular gift, or the figures are borderline, you may want to ask a tax adviser or solicitor to look at them.

How Seventide helps

Seventide sorts income and spending into categories, entered by hand or imported from bank statement CSV files, and builds each tax year’s table in the IHT403 layout, showing income, normal spending and surplus. Gifts marked “from income” are tested against that surplus, and a year with missing months is flagged as an estimate until it is complete. Statements can be kept in the encrypted document vault and linked to the year they support. The export is a working schedule for the executor, not the official HMRC form.

This guide explains published rules in general terms. It is not financial, tax or legal advice. Whether this exemption applies depends on the facts, and HMRC decides each claim. For decisions about gifts, you may want to ask a regulated financial adviser, a tax adviser or a solicitor.

Official sources

• GOV.UK: Inheritance Tax rules on giving gifts
• GOV.UK: Form IHT403, gifts and other transfers of value
• HMRC Inheritance Tax Manual: Normal expenditure out of income (IHTM14231)

Last checked: October 2026, figures for the 2026/27 tax year.