This guide is for people who give money to family out of income they do not need, and in particular for US citizens and green card holders doing it from a UK home. In the UK such a gift can be free of inheritance tax at once, with no upper limit and no seven-year wait. The United States has no equivalent relief, so the same standing order can be exempt in Britain and a reportable taxable gift in America.
What is the gifts out of surplus income exemption, and how much can I give?
There is no limit. Section 21 of the Inheritance Tax Act 1984 exempts a qualifying gift outright and immediately, however large, provided three conditions are met.[1] GOV.UK puts it plainly: regular payments are free of inheritance tax where you can afford them after meeting your usual living costs and pay them from regular monthly income.[17]
Two features of the drafting count. The section exempts a transfer “if, or to the extent that” the conditions are shown, so partial exemption is possible.[1][10] And the gift is exempt rather than potentially exempt, so nothing enters the donor’s cumulative total.[4]
The scale explains the attention: £20,000 a year of genuine surplus income moves £200,000 over a decade with no seven-year clock, against the £3,000 of the annual exemption. But whether any of it qualifies is settled after death on the donor’s records, not agreed in advance, and nothing here suggests a programme of gifts suits any particular person. Section 21 also does not displace the gift with reservation of benefit rules.[4] The wider estate picture is in our guide to UK inheritance tax and US estate tax.
What are the three conditions in section 21, and who has to prove them?
All three must be satisfied at once, and the statute requires each limb to “be shown” – in practice by personal representatives, from the donor’s records, years after the death.[1][4]
| Condition | The statutory words | What has to be shown |
|---|---|---|
| Normal expenditure | “made as part of the normal expenditure of the transferor” | A settled pattern of giving, judged against this donor’s habits, not an average person’s |
| Out of income | “(taking one year with another) it was made out of his income” | That the money came from income, not capital, measured across years |
| Standard of living preserved | “that, after allowing for all transfers of value forming part of his normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living” | That the income left after all the normal-expenditure gifts could meet the donor’s usual living costs |
“Normal” means normal for that donor, not for the average person.[5] HMRC weighs frequency, amount, nature, the recipients and the reasons, and gifts to recipients in the same category can be considered together.[7]
The authority is Bennett v Inland Revenue Commissioners [1995] STC 54: expenditure that accorded, when it took place, with the donor’s settled pattern – provable either by examining expenditure over time or by showing the donor assumed a commitment and complied with it, in which case a single payment may suffice.[2] HMRC accepts the commitment may be legal, religious or moral, or none of these.[8]
The third condition turns on arithmetic rather than intention: gifts do not qualify where the donor had to resort to capital to meet normal living expenses, and where the retained income was insufficient the exemption is lost in part rather than in whole.[10] The donor need not actually spend the retained income on living costs, so the test is whether the income left could have covered them.[10]
What counts as income, and what does HMRC treat as capital?
Income for section 21 is determined year by year in accordance with normal accountancy rules, is expressly not necessarily the same as income for income tax, and is the net income after payment of income tax.[9] That is a different figure from a self assessment return, and different again from a Form 1040.
HMRC counts employment and self-employment income, rents, pensions, interest and dividends.[9] Form IHT403 asks for salary, pensions, “Interest (including PEPs and ISAs)”, investments, rents, the income element of annuities and other income, less income tax paid – so a wrapper that is tax-free for income tax still produces income here.[16] Payments that look like income may still be capital in nature.[9]
Treated as capital are gifts of capital assets such as jewellery or securities, unless bought out of income to be given away; payments from insurance policies; and the capital element of a purchased life annuity, which section 21(3) expressly excludes.[9][1] Investment bond and drawdown withdrawals sit at the margins, and we found no authority settling them.
How long does unspent income stay income before it becomes capital?
There is no fixed rule, and this is the biggest practical uncertainty in the exemption: the statute sets no period, saying only that the gift must be made out of income “taking one year with another”.[1]
HMRC’s working assumption is two years: its manual says that if there is no evidence to the contrary it considers income becomes capital after a period of two years, and staff refer claims going further back to its technical team.[9] That is practice stated in an internal manual rather than anything in the Act, and we found no reported case endorsing it.[9][1]
The only reported decision went further. In McDowall and others v Commissioners of Inland Revenue [2004] STC (SCD) 22, an attorney made five payments of £12,000 from money accumulated in a deposit account over about three years. The appeals failed because the attorney had no power to make the gifts, but the Special Commissioners held that, if validly made, the gifts would have been normal expenditure out of income: it was identifiably money which was essentially unspent income.[11]
Two years is not a deadline and three years is not a safe harbour. Neither figure is in the Act, which asks only whether the gift was made out of income “taking one year with another”.[1] HMRC also warns against reading McDowall as authority that income never formally invested keeps its character indefinitely, and says it will resist that argument.[11] A claim on several years’ accumulated income rests on evidence of how and why it was accumulated.[11]
How do I prove a pattern of giving, and what does form IHT403 ask for?
The claim is made after the donor’s death, on page 8 of form IHT403: a year-by-year table of net income, total expenditure and surplus or deficit for every tax year in which gifts were made.[16] The expenditure side is as specific – mortgages, insurance, household bills, council tax, travel, holidays, nursing home fees.[16]
How many years to cover is a question of evidence, not a statutory minimum. HMRC says a reasonable span would normally be three to four years, but will consider longer where that helps show the gifts were normal.[6] A single gift can qualify as the first of a pattern, though HMRC requires strong evidence that it was genuinely intended as such and that further payments were realistically expected.[5][6]
There is no lifetime clearance procedure, so the claim is tested years later against whatever records survive. Since 1 March 2011 HMRC also treats gifts above £3,000 a year claimed as exempt out-of-income gifts as chargeable transfers when deciding whether an estate is excepted.[15]
How does this exemption work with the other gift exemptions and the seven-year rule?
Section 21 sits on top of the others, so relying on it does not consume the £3,000 annual exemption. A gift that fails every exemption becomes a potentially exempt transfer.[17]
| Exemption | Basis | Limit | Key feature |
|---|---|---|---|
| Normal expenditure out of income | s.21 | No monetary limit | Exempt at once, with no seven-year clock |
| Annual exemption | s.19 | £3,000 a tax year | Carries forward one tax year only |
| Small gifts | s.20 | £250 per recipient a tax year | All or nothing for that recipient |
| Marriage or civil partnership gifts | s.22 | £5,000 from a parent, £2,500 from a remoter ancestor, £1,000 otherwise | Must be in consideration of the marriage |
| Spouse or civil partner | s.18 | Unlimited, subject to a cap where the recipient is not a long-term UK resident | See our estate tax guide |
| Potentially exempt transfer | s.3A | The fallback, not an exemption | Out of account after seven years |
The annual exemption rolls over only once, and the current year’s £3,000 is used first.[12] The small gifts exemption is all or nothing: once gifts to one recipient exceed £250 in the year it is wholly lost for that recipient, so a £300 Christmas gift is not £250 exempt and £50 chargeable.[13] The marriage limits turn on the donor’s relationship to the couple, not the recipient’s.[14]
Where nothing applies the gift is potentially exempt: it leaves the estate if the donor survives seven years, and on death three to seven years later the tax tapers from 40% through 32%, 24%, 16% and 8%.[17]
Does the United States have an equivalent exemption for gifts out of income?
No. Nothing in the US rules mirrors section 21. US law does not ask whether a gift came out of income or capital, whether it was regular, or whether the donor could afford it: relief comes only from fixed-dollar exclusions, the marital deduction and two carve-outs.
The tax is imposed for each calendar year on the transfer of property by gift by any individual, resident or non-resident.[18] For an American in Britain it is citizenship, not residence, that keeps them inside it. Nor is there a seven-year rule: taxable gifts cumulate for life and reduce the exclusion available at death.[22]
The one US relief that genuinely parallels UK out-of-income gifting is the qualified transfer rule in section 2503(e) of the Internal Revenue Code. A qualified transfer is not treated as a gift at all, with no dollar cap, and there are exactly two of them: tuition paid direct to an educational organisation described in section 170(b)(1)(A)(ii), and amounts paid direct to a person who provides medical care as defined in section 213(d).[19]
That maps onto a common UK gifting pattern: grandparents paying school or university fees. The exclusion is narrower than it sounds. Only tuition qualifies, so board, books and other charges fall outside it, and the payment must go direct to the school or the provider. Paid to the parent to pass on, it is an ordinary gift inside the exclusion arithmetic, and the IRS states that contributions to a qualified tuition programme do not qualify for the education exclusion.[26] Tuition paid direct can also be normal expenditure out of income in the UK.[1]
The remaining reliefs are the marital deduction for a gift to a US-citizen spouse,[21] the annual exclusion per recipient, charitable gifts, and the unified credit sheltering cumulative taxable gifts up to the basic exclusion amount.[26][22]
What are the 2026 US gift tax figures, and what is the limit for a non-citizen spouse?
For 2026 the annual exclusion is $19,000 per recipient, the lifetime basic exclusion amount $15,000,000, the exclusion for gifts to a non-citizen spouse $194,000, and the top rate 40%.[24][23]
| Item | 2025 | 2026 |
|---|---|---|
| Annual exclusion per recipient (IRC s.2503(b)) | $19,000 | $19,000 |
| Annual exclusion, gifts to a spouse who is not a US citizen (IRC s.2523(i)(2)) | $190,000 | $194,000 |
| Lifetime basic exclusion amount (IRC s.2010(c)(3)) | $13,990,000 | $15,000,000 |
| Top transfer tax rate (IRC s.2001(c)) | 40% | 40% |
The rise in the lifetime figure is statutory, not an inflation adjustment: section 70106 of the One Big Beautiful Bill Act, Public Law 119-21, amended section 2010(c)(3) to set the basic exclusion amount at $15,000,000 for gifts made and deaths after 31 December 2025, indexed thereafter from a 2025 base.[22][24][25] No dollar figure for the matching applicable credit amount has been published, so none is given here.
The annual exclusion held at $19,000 for a second year because it is indexed from a 1997 base and rounds down to the nearest $1,000.[19] Where the recipient spouse is not a US citizen no marital deduction is allowed; instead section 2503(b) applies with $100,000 substituted for $10,000, indexed to $194,000.[21][24]
That gap matters more for US–UK couples than any other number here. Equalising assets between spouses is routine and unlimited in the UK, but for a US citizen married to a British spouse it is a reportable US gift above $194,000. The position at death is in our estate tax guide.
These are calendar-year figures, while every UK exemption runs 6 April to 5 April. The published Form 709 instructions are the 2025 revision, so they still show $190,000.[26]
When do I have to file Form 709, and can my spouse and I split gifts?
A US citizen or resident must file Form 709 for a calendar year in which they gave any one person other than their spouse more than the annual exclusion, gave a future interest, or want to split gifts – even where the unified credit means no tax is due.[26]
It is due on 15 April of the following year, extendable through an income tax extension or an automatic six-month extension on Form 8892.[26] That is not the automatic June date Americans abroad get for income tax. Spouses cannot file jointly, and a return is also required where gifts to a non-citizen spouse exceed the spouse exclusion.[26]
A return showing no tax still records how much lifetime exclusion has been used: the credit is set by reference to the exclusion that would apply had the donor died at the year end, less credit allowed earlier.[22][26]
Gift splitting is where a common planning assumption fails for this readership. Under section 2513 a gift to a third party counts as made one half by each spouse “only if at the time of the gift each spouse is a citizen or resident of the United States”, and both must consent.[20][26]
So an American in Britain married to a British spouse who is neither a US citizen nor a US resident cannot split gifts: the effective annual exclusion for a gift to an adult child is $19,000, not the $38,000 US-resident couples plan around.[20] Guidance written for two Americans does not transfer.
How do both systems hit the same monthly payment?
The same payment can be exempt in the UK and a reportable taxable gift in the US, because the two systems relieve gifts for different reasons: the UK looks at the source and regularity of the money, the US only at the amount per recipient each calendar year. A £24,000-a-year standing order to one adult child can be fully exempt under section 21,[1] yet at $1.30 it is about $31,200 to one recipient, some $12,200 over the 2026 exclusion: a return is due and that much lifetime exclusion is used.[24][26]
- No credit to claim in the usual case. The 1978 convention covers the federal gift tax and the UK capital transfer tax, now inheritance tax, with credit relief in Article 9.[3] But a credit needs a tax in the other country to credit, and where section 21 means the UK charges nothing there is none. That is how a credit article works, not a published position.
- Different years and currencies. UK exemptions run 6 April to 5 April while the US exclusion is per calendar year,[17][24] so giving in February and again the following January puts two payments into one US year. The surplus is computed in sterling[16] and the return in dollars, so a rate move alone can take an unchanged gift over the exclusion.
- The reverse direction. A non-US-person parent is generally outside US gift tax,[18][27] but a US person receiving over $100,000 from a non-resident alien in a year must report it on Form 3520.[28]
Whether a donor is within UK inheritance tax on their worldwide estate turns on long-term UK residence rather than domicile from 6 April 2025, as our guides to UK inheritance tax and US estate tax and US citizens living in the UK set out.
Worked example: five gifts, two tax systems (our own arithmetic)
Fictional household, for illustration only, and not personal advice. Hal Marsden is 69, a US citizen and a long-term UK resident for inheritance tax; Beth is 67, British, and neither a US citizen nor a US resident. Hal’s net income for 2026/27, after UK income tax, is £58,000 and household expenditure £36,000. He has paid £500 a month to each of two adult children since 6 April 2023, recorded in a signed letter of intent. Rules are held at 2026/27 UK and 2026 US levels; conversions use one illustrative rate of $1.30, an assumption rather than a forecast. The figures are our own arithmetic on the rules cited here, not output from Edale’s planner, and are not guaranteed; tax rules change.
Start with the surplus: £58,000 less £36,000 leaves £22,000, and the regular gifts (a) to (c) below total £21,750, so on these assumptions Hal is left with enough income to maintain his usual standard of living.[1][10]
| Gift | Amount | UK treatment | US treatment |
|---|---|---|---|
| (a) £500 a month to each of two children | £12,000 | Normal expenditure out of income: exempt at once | About $7,800 each: within the $19,000 exclusion |
| (b) £250 at Christmas to each of three grandchildren | £750 | At the £250 small gifts limit; £251 would lose it | About $325 each: within the exclusion |
| (c) Tuition paid direct to a grandchild’s school | £9,000 | Capable of being normal expenditure out of income | About $11,700: a qualified transfer, so excluded (tuition only) |
| (d) One-off house deposit to the elder child, paid from savings | £30,000 | No section 21 claim: the year’s surplus is already committed to (a) to (c). A potentially exempt transfer, less £3,000 for 2026/27 and £3,000 brought forward, leaving £24,000 on a seven-year clock | With (a) the child receives about $46,800; less $19,000 leaves about $27,800 taxable. A return is due, no tax, but the lifetime exclusion falls |
| (e) Transfer to Beth to equalise their assets | £160,000 | Exempt as a transfer between spouses | About $208,000: some $14,000 above the $194,000 spouse exclusion |
Three years of identical standing orders, plus the letter of intent, put gift (a) inside HMRC’s three-to-four-year span and Bennett‘s commitment limb.[6][2] Gift (d) fails on both limbs: on frequency and amount it does not resemble the pattern,[7] and there is no surplus income left for it to come out of.[10]
Four of the five gifts are exempt or outside charge in the UK; two are still reportable in the US, on one Form 709 for 2026 due on 15 April 2027.[26] Because the UK charges nothing on the exempt gifts, no UK tax exists for the treaty’s credit article to relieve,[3] and splitting them with Beth is unavailable.[20] Nothing here recommends making, delaying or restructuring any gift; the US position belongs with a US preparer.
How the Edale Wealth Hub helps
The surplus is the whole question, and it is a cashflow question before it is a tax one. Edale’s cashflow planner models a household across the US and UK at once, in any mix of currencies, year by year to age 100 and beyond. It computes UK income tax including Scottish rates, National Insurance and the personal-allowance taper, US federal income tax, payroll taxes and the net investment income tax, and the foreign tax credits and treaty treatment that connect them. The output is what the household keeps each year, set against its spending – the figure this exemption turns on.
Gifts are then handled as part of the plan. The UK inheritance tax calculation runs to the second death, with the nil-rate and residence nil-rate bands, the transfer between spouses, the taper above £2m, gifts and the seven-year rule, and unused pensions entering the estate from April 2027. Tax rules can be held at today’s thresholds or applied year by year as legislated and announced. A guided what-if puts gifts into a scenario to compare against the plan without them, and the sustainable spending solver shows the most the household can spend and still meet its plan – an outer bound on what is genuinely surplus.
The limits matter. The planner does not decide whether a section 21 claim succeeds: that is settled after death, by HMRC, on the donor’s records. There is no US gift tax calculation or Form 709 output, and US estate tax is not modelled. Edale does not prepare US tax returns or IRS forms and is not a US-registered investment adviser. Read about the cashflow planner or arrange a conversation.
Frequently asked questions
How much can I give away under the gifts out of surplus income exemption?
There is no monetary limit in section 21. A gift of any size is exempt from inheritance tax immediately, provided it is part of your normal expenditure, is made out of income taking one year with another, and leaves you enough income to maintain your usual standard of living. The practical limits are your surplus and your records.
How many years of gifts does HMRC want to see?
HMRC says a reasonable span would normally be three to four years, but will consider longer where that helps show the gifts were normal. A single gift can also qualify on strong evidence it was intended as the first of a pattern.
Does money I saved from income two years ago still count as income?
It may. HMRC’s working assumption is that income becomes capital after two years, but that is manual practice, not law: the Act says only “taking one year with another”, and in McDowall about three years of unspent income was accepted as still income.
Does the United States have an exemption for regular gifts out of income?
No. US gift tax takes no account of whether a gift came from income or capital, whether it was regular, or whether you could afford it. The nearest equivalent is the qualified transfer rule: tuition paid direct to a school, and medical costs paid direct to a provider, are excluded entirely.
Can my spouse and I use two $19,000 exclusions if only one of us is American?
No. Gift splitting under section 2513 is available only where each spouse is a US citizen or resident at the time of the gift. An American in Britain married to a British spouse who is neither has $19,000 per recipient, not $38,000.
Do I have to file Form 709 if no gift tax is due?
Usually yes. A return is required for any year in which you gave one person other than your spouse more than the annual exclusion, gave a future interest, or want to split gifts, even though no tax is payable. It is due on 15 April following the gift.
My British parents want to give me money. Do I owe US tax?
A gift of cash or investments from a parent who is not a US person is generally outside US gift tax, and gifts are not income to you. But a US person receiving more than $100,000 in a year from a non-resident alien or foreign estate must report it on Form 3520, with a penalty of 5% a month up to 25% absent reasonable cause.
Sources
- legislation.gov.uk — Inheritance Tax Act 1984, section 21 (normal expenditure out of income) (accessed October 2026)
- Bennett and others v Inland Revenue Commissioners [1995] STC 54, Chancery Division — report text (accessed October 2026)
- legislation.gov.uk — The Double Taxation Relief (Taxes on Estates of Deceased Persons and on Gifts) (United States of America) Order 1979, scheduling the Convention signed at London on 19 October 1978 (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM14231: normal expenditure out of income, introduction (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM14241: normal expenditure (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM14242: pattern of gifts (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM14243: factors to consider (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM14244: case law, Bennett v IRC (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM14250: out of income (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM14255: transferor’s standard of living (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM14251: case law, McDowall (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM14144: annual exemption, roll-over provisions (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM14180: small gifts exemption (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM14191: marriage or civil partnership gifts exemption (accessed October 2026)
- HMRC — Inheritance Tax Manual IHTM06027: excepted estates, restriction of normal expenditure out of income exemption (accessed October 2026)
- HMRC — Gifts and other transfers of value, Schedule IHT403 (version HMRC 06/26) (accessed October 2026)
- GOV.UK — How Inheritance Tax works: rules on giving gifts (accessed October 2026)
- Office of the Law Revision Counsel — 26 U.S.C. § 2501, imposition of gift tax (accessed October 2026)
- Office of the Law Revision Counsel — 26 U.S.C. § 2503, taxable gifts (annual exclusion and qualified transfers) (accessed October 2026)
- Legal Information Institute — 26 U.S.C. § 2513, gift by husband or wife to third party (accessed October 2026)
- Office of the Law Revision Counsel — 26 U.S.C. § 2523, gift to spouse (accessed October 2026)
- Office of the Law Revision Counsel — 26 U.S.C. § 2010, unified credit and basic exclusion amount (accessed October 2026)
- Office of the Law Revision Counsel — 26 U.S.C. § 2001, imposition and rate of tax (accessed October 2026)
- IRS — Revenue Procedure 2025-32 (inflation-adjusted items for 2026) (accessed October 2026)
- IRS — IRS releases tax inflation adjustments for tax year 2026 (IR-2025-103) (accessed October 2026)
- IRS — Instructions for Form 709 (2025), United States Gift (and Generation-Skipping Transfer) Tax Return (accessed October 2026)
- IRS — Instructions for Form 709-NA (2025) (accessed October 2026)
- IRS — Instructions for Form 3520 (accessed October 2026)