01 Sep 2026
For many people, giving financial support to family members is an important part of their financial planning.
Whether it is helping children with pension contributions or providing ongoing assistance, gifting can play an important role in Inheritance Tax (IHT) planning.
The normal expenditure out of income exemption under Section 21 of the Inheritance Tax Act 1984 allows for gifts to be made without being chargeable for IHT purposes, if specific conditions are met.
What are the requirements?
Under Section 21, gifts can be exempt from IHT if they are part of a person’s normal spending habits, are paid from their income and leave them with enough income to maintain their usual standard of living.
This exemption only applies to gifts made from surplus net income, not from capital or savings.
For example, withdrawals from an investment bond or the capital part of a purchased life annuity payment would not qualify.
The donor must also be able to cover their normal living costs from their remaining income and cannot give away income and then use capital to make up any shortfall.
Why is record-keeping important?
As the exemption is usually claimed after death, it is important to keep clear records of any gifts made under the normal expenditure out of income rules.
HMRC form IHT403 includes a schedule that can be used to record these gifts as they are made and can help support a future claim.
To work out whether gifts need to be reported, the donor must add together any gifts made under this exemption and any chargeable lifetime transfers made during the previous seven years.
If the total is more than the available nil rate band, all gifts must be reported to HMRC using form IHT100.
HMRC will then review whether the exemption applies and confirm its decision in writing.
If the total remains within the nil rate band, the exemption is usually reviewed only after the donor’s death, when the executors can claim the exemption using forms IHT400 and IHT403.
How can we help?
Planning for IHT helps to safeguard your family’s future, as utilising vital allowances enables you to minimise your IHT contributions.
Our team of accountants can support you with gifting out of income so that you can provide for your family’s future.
Get in touch with our team for support with Inheritance Tax planning.
