Inheritance tax and gifts out of income for couples
25th July 2025
Posted in Articles, IHT, Inheritance Tax, Trusts and Estates by Andrew Marr
Normally any gifts that people make will still fall into their estates for inheritance tax (IHT) purposes if they die within seven years. Any tax on these potentially exempt transfers (PETs) would be fully payable in the event of a death within three years and then after that there is some tapering. If 40% is payable in respect of a death within three years this rate is tapered by 8% for a death between three and four years; another 8% for a death between four and five years and so on until the rate is 0% for a death after seven years.
The above rules do not apply for so-called regular gifts out of surplus income. This exemption will apply if the gifts are regular and can come out of net income after normal living expenses have been deducted from that income. ‘Normal living expenses’ do not mean ‘average living expenses’ and so if the individual lives like a king and flies first class to go on holiday etc., then this must be assumed to come out of the income.
It is easy to get confused with these rules where couples are involved and that is understandable because there seems to be very little in the way of commentary on the subject.
Example
Mrs Wilson earns £300,000 after tax and has a slob of a husband who refuses to work but enjoys drinking fine wine and going on holiday. Conversely, Mrs Wilson is a workaholic and likes nothing better than to work and curl up with a cup of cocoa and a good book at the end of the day. Meanwhile, Mr Wilson watches expensive pay-as-you-go films on Amazon, while drinking expensive bottles of St Emilion wine.
Mrs Wilson’s annual expenditure is £200,000 of which £160,000 could fairly be allocated to her husband and £40,000 to her expenses. She is keen to take advantage of the regular gifts out of surplus income exemption but is unsure how much can be given each year with the guarantee of being IHT-free.
One view would be that she could give away £260,000 every year, being her ‘surplus income’. We think that the better view (and the view likely to be held by HMRC) is that the figure is £100,000. This would work on the basis that “keeping” her husband is actually part of her normal expenditure.
Forbes Dawson view
It is worth noting that this exemption is not ‘all or nothing’ and so if Mrs Wilson got things wrong and died within seven years, then the exemption could still apply to surplus income.
In cases where one spouse has a level of income which is less than their share of expenses, then it is sensible to assume that they cannot make any gifts which would be subject to the exemption. A reasonable position would be to assume that the lower income spouse has spent all their net income on their portion of expenses and the other spouse has subsidised the shortfall (which will be treated as part of their normal expenditure). Essentially, this is akin to joint taxation for this purpose, despite independent taxation applying in the UK! As the outcome will only become relevant on death, it is important that good quality documentation is maintained.
The position will get more complicated when the low-income spouse is actually living off capital (rather than the income of the high earning spouse).
If, for example, Mr Wilson was living off his own capital, then Mrs Wilson could contend that £260,000 would qualify each year as an exempt gift out of income. Generally, it will be a case of the executor putting the best foot forward on death, but this is very difficult without contemporaneous evidence. We recommend that the form IHT403 (or similar) is completed annually by the donor to avoid any such issues.
