Your Name
Your Address
Date

To Whom It May Concern,

I confirm that I have made regular gifts of £[amount] to [recipient’s name] from my surplus income. These gifts do not affect my standard of living and are made from income, not capital. I intend to continue making these gifts on a regular basis.

Please find attached supporting documents showing my income and expenditure.

Yours sincerely,
Your Signature
Your Name

It’s essential to ensure the template is completed with precise figures, and that supporting documentation is comprehensive. Consider including a schedule of gifts, annual summaries of income streams (such as dividends, rental income, and bonuses), and a breakdown of regular expenditure. Professional advisers often recommend updating this letter annually and maintaining a file of all correspondence and evidence.

Why Gifts Out of Surplus Income Matter for High Net Worth Estates

For those with substantial estates, gifts out of surplus income can be a strategic tool for inheritance tax planning. When structured correctly, these gifts fall outside the estate immediately, rather than being subject to the seven-year rule. This can make a significant difference to the overall tax liability, especially where annual income far exceeds living costs.

Legal Background: Inheritance Tax and HMRC Requirements

Under the Inheritance Tax Act 1984, section 21, gifts out of surplus income are exempt from inheritance tax if:

• The gifts are made from income, not capital.

• They are part of a settled pattern (e.g., monthly, quarterly, or annually).

• The donor’s standard of living is maintained.

HMRC will expect to see evidence that the gifts are genuinely from surplus income, and that the donor is not compromising their lifestyle or drawing on capital assets.

What Counts as Surplus Income for High Net Worth Individuals?

Surplus income is the amount remaining after all regular outgoings are met. For high net worth individuals, this may include:

• Mortgage or rent on multiple properties

• Staff salaries (e.g., housekeepers, drivers)

• School fees and tuition

• Insurance premiums

• Charitable donations

• Lifestyle costs (travel, memberships, entertainment)

Only the income left after these expenses can be gifted. It’s important to document all sources of income, including investment returns, business profits, and trust distributions.

How to Prove Gifts Are from Surplus Income

HMRC will expect:

• Detailed annual schedules of income and expenditure

• Evidence of regularity (e.g., standing orders, annual summaries)

• Clear documentation of the intention to make gifts from surplus income

• Copies of correspondence with recipients

• Professional accounts or statements prepared by advisers

For substantial gifts, consider including a statement from your accountant or financial adviser confirming the surplus income calculation.

Common Mistakes to Avoid

• Treating ad hoc or one-off gifts as surplus income gifts

• Failing to maintain a consistent pattern of gifting

• Not updating records when income or expenditure changes

• Using capital or selling assets to fund gifts

• Overlooking lifestyle costs unique to high net worth individuals

Top Tips for Drafting Your Letter

• Specify the frequency and amount of gifts, and reference the source of income (e.g., “from annual dividend income”).

• Attach a schedule of income and expenditure, prepared or reviewed by a professional.

• State explicitly that gifts do not affect your standard of living, referencing your annual budget.

• Update the letter and supporting documents annually, or whenever your financial circumstances change.

• Keep all correspondence and evidence in a secure, accessible file.

Frequently Asked Questions

Can I gift large sums out of surplus income?
Yes, provided the gifts are regular, from income, and do not affect your lifestyle. HMRC will scrutinise larger gifts more closely.

Should I involve my accountant or financial adviser?
For high net worth estates, professional input is strongly recommended to ensure compliance and robust record-keeping.

What evidence should I attach?
Annual accounts, bank statements, schedules of income and expenditure, and correspondence with recipients.

Conclusion: Keeping Compliant and Protecting Your Legacy

For high net worth individuals, gifts out of surplus income are a powerful inheritance tax planning tool. Rigorous documentation, professional oversight, and regular review are essential to ensure compliance and protect your legacy. Use the template above, keep your records up to date, and consider annual reviews with your advisers to maintain a clear audit trail.