Just 2% of estates have made gifts out of surplus income under inheritance tax rules to minimise their tax burden in the past three years, according to new data.

Just 1,490 estates had used the gifts out of surplus income gifting rule, according to data collected from HMRC by wealth manager Quilter via a freedom of information request.

Despite the gifting rules being a useful way to pass on wealth tax efficiently, the number of estates that made gifts from surplus income has fallen over the past three years:

Source: Quilter via FOI request to HMRC, 6 May 2025

Unlike many gifts, gifts out of suplus income to not require the gifter to survive for seven years to escape IHT. Provided the gifts form part of the gifter’s normal expenditure, were made out of income, and left the gifter with enough income to maintain their normal standard of living, the gift is exempt from IHT.

There must also be a pattern of regular gifting, rather than one-off lump sums, along with clear evidence that the gifts came from surplus income rather than capital.

Quilter expects the use of gifts from surplus income to increase dramatically over the next few years as the Government brings pensions within the scope of IHT.

Currently, pensions sit outside of the IHT net, allowing individuals to pass on their unused pension funds free of inheritance tax. However, from 2027, unused pension wealth will become part of the taxable estate, meaning it will be liable for IHT at 40% on amounts exceeding the nil-rate band.

Rachael Griffin, tax and financial planning expert at Quilter, said gifting out of surplus income is particularly attractive in light of the upcoming pension changes as under pension freedoms, individuals can increase their withdrawals from a pension, using the additional income to fund a tax-free gifting strategy rather than leaving pension wealth exposed to IHT.

She said: "For those who can afford to make gifts from surplus income, this is an incredibly valuable strategy, as the relief applies immediately without needing to wait seven years, which is required for most other gifts above the £3,000 annual exemption.

“However, good record-keeping is absolutely essential. HMRC requires clear documentation proving that gifts were made from surplus income rather than capital, and that they do not reduce the donor’s standard of living.”

IHT receipts have risen for HMRC to record levels this year.

Inheritance tax receipts for the period April 2024 to March 2025 were £8.2bn, a rise of £0.8bn compared to the same period last year and a new record.

Nil-rate bands continue to be frozen, currently until 2030, despite rising property prices.