Many people are aware of the inheritance tax relief for gifts out of excess income. It is a very useful provision for people who want to prevent their inheritance tax position from worsening due to the accumulation of regular income. It has in fact become a big talking point as a result of recent legislation which will bring pensions into the IHT net as of April 2027.

If the provision applies to your gifts, they are out of your estate for IHT purposes immediately rather than having to be survived by seven years.

The standard conditions for the exemption

On a casual reading of this clause (s21 IHTA 1984 shown below) it looks simply worded and straightforward, and you might conclude that as long as:

  • It’s out of income and the gifter doesn’t have to revert to capital and
  • Their standard of living is not compromised

    that the exemption would apply. However recent case law makes it clear that the definition of ‘normal expenditure’ is of crucial importance in determining whether the gift is exempt.

    Section 21 IHTA 1984: what the legislation says

    This section states that:

    "21 Normal expenditure out of income 

    (1) A transfer of value is an exempt transfer if, or to the extent that, it is shown:

    (a) that it was made as part of the normal expenditure of the transferor, and 

    (b) that (taking one year with another) it was made out of his income, and 

    (c) that, after allowing for all transfers of value forming part of his normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living."

    The significance of the Hosking case

    The Hosking case (Hosking v HMRC [2026] UKFTT406 TC) is a thorough interrogation of the term ‘normal expenditure’. It concludes that expenditure will only be ‘normal’ for the purposes of this exemption if either:

    It follows a settled pattern of giving where:

    • Gifts follow a regular timing pattern
    • The quantum of gifts is either the same, or based on a formula or method that remains the same

    OR

    • There is a clear prior decision or commitment which clarifies when gifts will be made and the formula which will be used to calculate them.

    Key takeaway

      We would advise that those seeking to utilise this exemption draw up a document that formalises their gifting commitment in a clear and structured way. For instance, a signed, dated letter to the intended recipient of funds stating that:

      • you intend to pay 50% of their annual mortgage repayments each year by way of one annual payment in December; or
      • you intend to pay £5,000 cash per quarter on the first of January, April, July and October; or
      • you intend to gift 10% of your monthly pension amount by direct debit on the 5th of each month.

        One positive point of clarity arising from this case is that there is no minimum period over which payments need to be made in order for them to qualify as ‘normal’ expenditure provided there is a stated intention.

        How can CT help?

        If you have questions regarding gifts out of excess income, please get in touch with your usual CT contact or the team via personaltax@ct.me.