Following the Autumn Budget announcement that pensions will no longer be exempt from inheritance tax from April 2027, clients are looking more carefully at other ways to pass on wealth tax-efficiently. Darren Austin-Smith, New Quadrant's Head of Trust Services, explores how the gifts from excess income exemption works and why combining it with a discretionary trust can be particularly effective.

What is the exemption?

The gifts from excess income exemption allows individuals to make regular gifts from their surplus income without those gifts being subject to IHT. Unlike the annual gift exemption of £3,000, there is no upper limit — provided the conditions are met.

The conditions

To qualify, three criteria must be satisfied:

  1. The gifts must come from income, not capital. Income includes salary, pension income, rental income, dividends and interest.
  2. The gifts must be part of a normal pattern of expenditure. They should be regular and consistent — monthly, quarterly or annual payments made with the intention to continue.
  3. The gifts must not affect the donor's standard of living. After making the gifts, the donor must be able to maintain their usual lifestyle without drawing on capital.

Good record-keeping is essential: evidence of income and outgoings, records of amounts gifted and dates of payment, and ideally a written declaration of intent to make regular gifts.

Using a discretionary trust

Rather than making outright gifts to beneficiaries, surplus income can be paid into a discretionary trust. This provides greater flexibility and control over how and when funds are distributed, while protecting assets from beneficiaries' creditors or misuse.

Provided the payments into the trust meet the conditions above, they will not be treated as transfers of value for IHT purposes. The future capital growth and income within the trust also remains outside the settlor's estate.

Getting in touch

If you would like to explore whether the gifts from excess income exemption could form part of your estate planning, please contact Darren Austin-Smith, Head of Trust Services, at darren.austin-smith@nqpltd.com or on +44 (0)20 7430 7171.