Give Smarter, Not Harder: The Case for Surplus Income Gifting

When it comes to inheritance tax (IHT) planning, most people think about big gestures like trusts or passing down property. But what if I told you there’s a simple, often-overlooked way to reduce your taxable estate—without complicated paperwork or massive sacrifices? It’s called making gifts out of surplus income, and it’s one of the most tax-efficient ways to share your wealth while you’re alive.

Here’s the lowdown on how it works and why you should consider it.

What Are Gifts Out of Surplus Income?

This is all about using your excess income—money you don’t need to maintain your current lifestyle—to make regular gifts to loved ones. Think of it like spreading the love while keeping the taxman at bay.

The key point? These gifts don’t count towards your £3,000 annual exemption or your seven-year rule for IHT. If you do it right, they’re completely tax-free. That means they won’t chip away at your estate’s value when it comes to calculating IHT after you’re gone.

What Counts as Surplus Income?

This isn’t about scraping together pennies or cutting corners. Surplus income is what’s left after you’ve paid for all your regular living expenses, like bills, holidays, and day-to-day spending. If you’re sitting on a healthy cash flow, this could be a game-changer for your family.

For example, if your monthly income is £5,000 and you only need £3,000 to cover your expenses, that £2,000 could be gifted tax-free—provided you meet the rules.

The Rules You Need to Know

Okay, so there are a few hoops to jump through, but it’s nothing too scary. Here’s what you need to keep in mind:

1. It must come from your income, not your capital. Selling investments or cashing in savings doesn’t count—it must be from your regular income, like salary, pension, or dividends.
2. It must be genuinely surplus. You can’t give away money you need to maintain your lifestyle. That means you’ll need to prove you have enough income to meet your expenses.
3. The gifts must be regular. This isn’t a one-off situation. You need to show an intention to give regularly, whether that’s monthly, quarterly, or annually.
4. Keep good records. HMRC loves paperwork. Make sure you track your income, outgoings, and the gifts you make, just in case you need to provide evidence down the line.

Why Bother?

Here’s the thing: IHT in the UK can hit as high as 40% on anything above the nil-rate band (£325,000 for individuals, or up to £1 million with certain allowances). If you’re able to reduce your estate while helping your loved ones financially, why not take advantage of it?

Starting early gives you the flexibility to spread your generosity across more years, making it easier to fit into your budget. It’s like planting a tree: the sooner you do it, the more shade your loved ones will enjoy down the line.

A Simple Example

Let’s imagine John, a retired businessman, receives £70,000 a year in pension income but only spends £40,000 to maintain his lifestyle. That leaves him with £30,000 of surplus income.

John sets up a standing order to transfer £2,500 a month to his two grandchildren to help with school fees and university costs. Over five years, he’s gifted £150,000 tax-free—and it doesn’t touch his estate.

Final Thoughts

Making gifts out of surplus income isn’t just a tax-savvy move, it’s also a meaningful way to see your family enjoy your generosity while you’re still around. Whether it’s helping with weddings, education, or a first home, these gifts can make a real difference—and leave you with fewer sleepless nights about what tax your loved ones will have to pay when you’re no longer here.

If this sounds like something you’d benefit from, why not take the next step? I’m offering a no-obligation 30-minute session to review your IHT position and explore how gifting out of surplus income could work for you. Alternatively, if you’re ready to get started, I can provide you with a free template to document your intention to establish a regular pattern of giving.

Having this in writing is invaluable—it serves as clear evidence for HMRC to show that your gifts meet the criteria for surplus income exemptions. It’s a simple but effective way to make the process smooth and stress-free.

Get in touch with me at andrew.e.gray@sjpp.co.uk to arrange your session or request a complimentary copy of the template.

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Gilson Gray Financial Management is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances. Tax advice is not regulated by the Financial Conduct Authority.