Gifts from Surplus Income – An Often Overlooked IHT Allowance

While most of us would love to have a higher income, those who are concerned about their Inheritance Tax position may find this more of a headache than a benefit as they see not only their savings increasing but also their eventual tax bill.

There is, however, a much under-used Inheritance Tax allowance that permits gifting of such “surplus” income during your lifetime. The amounts you can gift are not subject to any upper limits (provided they fit certain conditions) and there is no need to wait seven years for the gifts to become tax free as they are immediately exempt from Inheritance Tax.

Claiming the relief is quite straightforward and you can begin gifting straight away. The conditions are that you can only give away that proportion of your income that is genuinely surplus to requirement and you must do it on a regular basis. One off gifts are not permitted but you don’t have to make gifts to the same person every year. You can make them to whoever you like – an individual, a group of people or to a family trust fund, for example.

In order to keep the taxman happy there will need to be an element of bookkeeping carried out and a record of the gifts made retained along with a copy of your tax return for the year concerned. There is no reporting requirement during your lifetime, however, as the exemption is claimed after your death as part of the Inheritance Tax reporting exercise. As both Accountants and tax advisers, we are ideally placed to provide this service for you leaving you simply to tell us who is to receive the gifts each year.

Gifts from surplus income can be made in addition to all of the other lifetime gifting allowances, making them a potentially rich source of Inheritance Tax mitigation.

One final benefit is how your “income” is defined for the purposes of this relief. While Income Tax ignores sources such as ISA accounts, that income can be brought into account when calculating the amount of surplus to be gifted. Therefore, if you have significant income from ISAs not only can you avoid the Income Tax on that income but also the Inheritance Tax it would have been subject to had you left it in the account to accumulate.

Sutton McGrath Hartley is a multi-disciplinary firm of chartered accountants, financial advisers and lawyers offering comprehensive financial expertise for all business, personal and family interests. Our specialist departments can help with tax, wills, trusts and estate planning.

To discuss your requirements please contact Tom Rodgers on 0114 266 4432 or


Tom Rodgers, Solicitor at Sutton McGrath Hartley Wills & Probate
Tom Rodgers, Solicitor at Sutton McGrath Hartley Wills & Probate

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