Almost three quarters (72%) of UK adults are not aware that money regularly gifted from spare or excess income is immediately exempt from inheritance tax (IHT), Canada Life has revealed.

The financial services firm’s latest research found that 31% of gifts given by over 55s in the last seven years were funded from surplus or spare regular income.

Canada Life said this suggests that many may already be using these exemptions without understanding them or keeping the records that HMRC requires.

Under the rules, gifts must meet certain conditions to qualify.

These includes gifts having to come from income, not capital; gifts must form a regular pattern, such as a monthly bank transfer of an annual gift; and gifts should not compromise the giver’s standard of living.

Canada Life’s tax, trusts and estate planning expert, John Chew, said that with new IHT rules coming into force in April 2027, many families are set to be caught out and may be looking for strategies to manage their potential liabilities.

He added: "For those fortunate enough to find themselves with surplus regular income that is not needed to cover living expenses, a powerful option is to gift that excess income regularly to loved ones.

"Under HMRC’s ‘normal expenditure out of income’ rules, any gifts that qualify as regular gifts from surplus income are immediately exempt from IHT. There is no need to survive seven years after making the gift, unlike many other forms of gifting.

"However, the exemption is relatively unknown and often underused because there are several strict conditions. The donor (or executors after death) must be able to evidence that all conditions are met. Without that evidence, HMRC may treat the gifts as potentially taxable."

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