Gifts out of excess income
IHT legislation provides an exemption where you can show that a lifetime gift formed part of your normal expenditure.
If you give away revenue before it loses its income character, the cash is never deemed to have been accumulated to capital, and therefore the gift is not considered a PET. Instead, it's exempt from all tax for both the donor and donee, irrespective of how long you (the donor) survive. For example, a gift of £35,000 made from excess income rather than capital could present a saving of up to £14,000 of tax.
There are rules about which gifts can qualify. Most importantly, the gift must be made from surplus income. This means that after making the gifts, you must retain enough income to maintain your normal standard of living. Also, gifts must be considered ‘normal’, by virtue of conforming to a settled pattern, which is in turn demonstrated by regular amounts or the commitment to a recurrent expenditure, e.g. school fees or life assurance premiums.