Inheritance tax (IHT) is becoming a bigger talking point than ever. HMRC collected £8.2bn in IHT in the year to March 2025 – an 11% jump on the year before. And from 2027, pensions will be pulled into the taxable estate, meaning the numbers are only going one way.

For families, that’s huge. And for advisers, it means more questions from clients about how to plan ahead. One relief that’s suddenly in the spotlight is the normal expenditure out of income exemption (NEOOI).

Why? Because unlike many other routes, this one lets you move money out of your estate straight away – no seven-year wait, no limit beyond what your surplus income allows. Sounds great, right? But, as always, there are catches.

Let’s take a closer look at the 15 key questions people ask about this exemption – and the practical points you’ll want to keep in mind.

1. When is a gift ‘normal’?

It’s not about a one-off cheque – HMRC wants to see a habit. Think standing orders, annual Christmas cheques, or paying someone’s school fees each term. Three or four years of regular giving is usually enough to prove a pattern, though sometimes shorter is accepted if there’s clear commitment.

2. Do gifts have to go to the same person?

No – what matters is the class of recipient. You could gift to “children” or “grandchildren” as a group, or even into a discretionary trust.

3. Must they be the same amount?

Not necessarily. The amounts should look consistent – either the same cash figure, or the same slice of income. Big outliers risk HMRC disallowing part of the claim.

4. Do they have to be at the same intervals?

Again, no fixed rule. Monthly, quarterly, annually – all can work. Even every two years is possible, though it may take longer to show a clear pattern.

5. What counts as income?

Here’s where it gets tricky. HMRC looks at net income – salary, pensions, dividends, rental income, and even ISA distributions if you actually take them out. It’s spendable income, not capital.

6. Is pension tax-free cash income?

Yes – but be careful. Taking out a big lump of tax-free cash and gifting it straight away won’t look like income. Spread it out like an annuity and you’re on safer ground.

7. What about bond withdrawals?

Generally, they’re treated as capital, not income – even if they generate a taxable gain.

8. Can you use accumulated income?

Only if it hasn’t been “capitalised”. Leave it sitting in the bank too long (HMRC says two years or more) and they’ll call it capital.

9. Can spouses pool income?

No. Each spouse is assessed separately. A high earner can’t boost their partner’s surplus by “sharing” income – though covering more of the joint bills can reduce their own surplus.

10. What is surplus income?

Simply the difference between income and living costs. Gifts should come from what’s left over once your lifestyle is paid for.

11. What counts as living costs?

Everything from mortgage and utilities to holidays and club memberships. One-off big spends like a new kitchen might be argued as outside “normal” – but again, HMRC decides case by case.

12. How do couples split expenses?

Household costs are usually assumed to be shared equally, even if one pays more. But personal costs (like hobbies or a gym) stay with the individual.

13. What’s a ‘usual standard of living’?

It’s whatever the donor’s lifestyle was at the time of gifting. If circumstances change (say, job loss), HMRC may still accept that the exemption applies.

14. Do gifts have to be reported each year?

No – the claim is made after death. That means a lifetime of careful record-keeping is vital, or else executors could struggle later.

15. How is the exemption claimed?

Executors use form IHT403, showing seven years of income, spending, and gifts. Without clear records, HMRC can reject the claim – turning what you thought was exempt into a chargeable gift.

Final thoughts

This exemption can be powerful – gifts are outside the estate straight away, with no cap other than surplus income. But it’s also one of the most scrutinised by HMRC. Push the definition of “income” or “normal” too far, and the relief can vanish.

The safest move? Keep good records, stick to a pattern, and don’t get greedy with what you call surplus. Used wisely, it can shift wealth to loved ones in real time – without giving HMRC more than its fair share.