There is growing concern that Chancellor Rachel Reeves may target a popular inheritance tax loophole used by many UK families. This has many households anxious. If you have given money to your children or grandchildren, or plan to use extra income for tax-free family support, this article is for you.
Changes to inheritance tax rules in 2025 could affect how we transfer wealth. The little-known “gifting out of income exemption” may be limited or removed. We will explain the current rules, how they work, and what you can do now to protect your family’s future. We will also provide practical advice, expert insights, and planning tips to help you stay informed.
Understanding Inheritance Tax Gifting Rules
The UK has rules for inheritance tax that help people pass on wealth without paying a 40% tax. Some rules, like the £3,000 annual exemption, are well-known, but others, like the gifting out of income exemption, are less familiar but very helpful for planning.
With the gifting out of income rule, you can give away any amount of money without tax, as long as it comes from your regular income and doesn’t affect your daily living. Unlike other gifts, these are immediately exempt from inheritance tax, so you don’t have to wait seven years. This is especially useful for high earners who want to help their family now while lowering the future tax on their estate.
This rule is also flexible. You can make gifts monthly, quarterly, or yearly, as long as they are regular and part of your normal spending. Many people use this to help pay for grandchildren’s school fees, support a child’s mortgage, or contribute to junior pensions and ISAs.
The Rule in HMRC’s Crosshairs for 2025
Reports indicate that there are increasing worries about possible changes to HMRC’s inheritance tax rules in 2025. Wealthy individuals, especially high earners, often use these rules to pay for private school fees, property deposits, pensions, and trusts, which significantly lowers the taxable value of their estates.
The DWP and HMRC budget changes aim to close tax loopholes and improve public finances. Since there is currently no limit on these gifts from surplus income, it makes sense that the Treasury is paying attention.
What’s troubling is that this rule, though not widely used by most people, provides a fair way for families to pass on wealth. If it is capped or removed, it could harm families who depend on regular income instead of inherited wealth to support their children. The proposed changes are still being reviewed, but experts warn that this exemption is a target for the Chancellor.
What Counts as a Surplus Income Gift?
Let’s clarify the definitions. A surplus income gift, according to HMRC, is money that:
- Comes from your net income, not from savings or investments.
- It is part of your regular spending, like monthly payments or term fees.
- Does not affect your normal lifestyle.
This is important for following the rules. You must show that your gifts meet all three criteria. If you use your savings or lower your living standards, the exemption won’t apply.
Gifting money to children in the UK for education, housing, or care can qualify as a surplus income gift. However, you need to provide proof, which can be tricky. HMRC examines these gifts closely during probate, so keep your financial records accurate and consistent.
Documentation Is Key – Keep Detailed Records
Many people make mistakes here. To ensure your HMRC gifting exemption claim is valid, you need clear documentation:
- A letter explaining your plan to make regular gifts.
- A summary of your income and expenses showing extra funds.
- Bank statements showing steady payments over time.
- Copies of any written agreements or notes given to recipients.
Even informal notes can show your intent. The first gift in a series can still qualify, even if the donor dies soon after, as long as there’s proof it was meant to be part of a regular giving pattern. It’s wise to send a letter with the first gift and keep a copy with your will.
Without these documents, your family may struggle to claim exemptions after your death. That’s why we suggest talking to a specialist. Our Inheritance Tax Advice London experts can help you set up the right process and keep proper records.
Why Families Are Worried About the Rule Change
If the rule changes or is removed, many families could face taxes or limits on future gifts. This affects not just wealthy families but also middle-income families who are helping children or grandchildren during tough times.
Transferring family wealth in the UK is more important than ever. With rising house prices and private school costs, many parents and grandparents depend on this rule for support. Removing this exemption could raise taxes and make it harder for younger generations to get the necessary help.
There are also worries about retroactive enforcement. If HMRC changes the rules without giving notice, past gifts could be restricted. This could create confusion and financial stress during an already challenging time of dealing with estate matters and loss.
How to Reduce Inheritance Tax UK – While You Still Can
Now is the time to take action. If you want to lower the inheritance tax in the UK, consider these options:
- Use the £3,000 annual exemption and carry forward any unused allowance from last year.
- Give wedding gifts of up to £5,000 for each child, £2,500 for grandchildren, and £1,000 for others.
- Set up a trust for long-term estate and tax planning.
- Get a life insurance policy in trust to cover potential inheritance tax bills.
- Maximise gifting from your income while it’s still allowed.
- Invest in assets that qualify for Business Property Relief.
These methods can help reduce your taxable estate, but not all will fit every situation. You need personalised advice. Contact our Tax Investigation Service London team for help in choosing the right strategies.
Will HMRC Remove the Tax-Free Gifting Rule?
Will HMRC remove the tax-free gifting rule? While nothing is confirmed, it seems likely. There are calls to change the inheritance tax (IHT) system, and with government spending increasing, this exemption looks vulnerable.
Many think tanks and financial experts suggest tightening or ending this rule to make the system fairer. However, some financial planners believe this would unfairly hurt families who support loved ones with their income rather than their savings or inheritance.
What should you do? Prepare for the worst and plan now. Delaying could lead to missed chances and higher taxes later. Gather your documents, consult advisors, and take action before the next Budget announcement.
What Are the New Rules for Gifting Money in the UK?
There are no official changes to inheritance tax rules yet, but updates for 2025 will likely come in the next Budget. These may include:
- A limit on how much you can gift each year using the exemption.
- Stricter definitions of “regular” and “normal” spending.
- A requirement to pre-declare or register gifts with HMRC.
- More checks on claims during estate assessments.
If you’re curious about the new gifting rules in the UK, stay alert and consult trusted advisors to ensure you follow the rules. Even a small mistake can invalidate a well-meaning gift.
Is Gifting from Income Still Tax-Free in 2025?
Yes, it is tax-free for now. But will gifting from income still be tax-free in 2025? That might change soon. HMRC is looking at all exemptions as part of a big review of the IHT system. Sources say this rule is one of the top ones being examined.
This is your chance. If you want to give regular gifts to family and friends, now is the time to act. With good planning, you can take advantage of this exemption before any changes happen.
How Clarkwell & Co. Can Help You Navigate Change
At Clarkwell & Co., we help families in London with their estate planning. Our skilled accountants focus on:
We know that inheritance planning can be complicated and emotional. That’s why we take a personal approach, ensuring every gift and plan is carefully considered and recorded. We can help you evaluate your income, prepare your documents, and maximise your exemptions before any new rules start.
Act Before the Window Closes
The message is simple: the inheritance tax loophole for surplus income gifts may not last long. Now is the best time to plan, not later.
Talk to a trusted accountant, check your income, and keep your records in order. Think about making gifts before the HMRC inheritance tax updates in 2025.
At Clarkwell & Co., we can help you make smart financial decisions. If you need guidance or expert help, contact us today, and let’s create a solid plan together.
