How do you claim IHT gifting from surplus income if your income is irregular?

Q. When you are gifting from surplus income for inheritance tax (IHT) purposes, your income may be from a variety of sources and come at different frequencies - for example: pensions monthly, savings interest annually, dividends annually. Does HM Revenue & Customs (HMRC) accept the giving of gifts from surplus income on an annual basis, bearing in mind the actual income figures will only be known after a tax year ends?

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A. Gifting from surplus income is one of the most valuable - and often underutilised - IHT allowances.

Under the rule, you can gift a potentially unlimited amount, provided you can prove to HMRC that:

1. The gift is made out of your income – not your capital.
2. It must be part of a regular pattern of gifting.
3. The donor must retain enough income to maintain their usual standard of living.

Income in retirement is often more complicated than income when you’re working and, as you say, can be patchy. Therefore, HMRC does accept gifts from surplus income, looking at income on an annual basis. The important thing is that you can demonstrate a clear pattern over time.

Let’s look at a hypothetical example.

Margaret is retired and receives income from a combination of sources: a defined benefit pension, savings interest, and dividends. Her income varies year to year:

2022/23: £31,000

2023/24: £40,000

2024/25: £38,000

Margaret decides to gift £3,000 to each of her two children at the end of each tax year, once her income is confirmed. She ensures:

• The gifts are made from income, not capital.
• She retains enough income to maintain her lifestyle.
• She documents her income sources and keeps records of the gifts.
• She writes a letter of intent stating her plan to make annual gifts from surplus income.

Over time, this establishes a regular pattern of gifting, which can qualify for the IHT exemption for gifts out of surplus income, provided her executors can demonstrate this retrospectively with supporting documentation.

Here’s a quick checklist of best practice when claiming the gifting from surplus income allowance:

• Document income sources: Include pensions, dividends, rental income, savings interest, etc.
• Track gifts: Maintain a schedule of gifts made, including dates, amounts, and recipients.
• Write a letter of intent: Before starting, outline your intention to make gifts from surplus income.
• Keep evidence: Bank statements, income summaries, and expenditure records help to prove the gifts were affordable and regular.

HMRC has a form, IHT403, which is used when reporting gifts after a person's death. Looking at this can help to make sure you are keeping records in the right format.

Please remember that this is not individual tax advice. Being tax-efficient in retirement is a complicated area and will depend entirely on an individual’s circumstances, so for many people it would be helpful to speak to a specialist tax adviser.

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