Over the past couple of years, we’ve seen a noticeable increase in clients asking about Normal Expenditure Out of Income (NEoI) as part of their Inheritance Tax planning.

That isn’t surprising.

With frozen IHT thresholds, rising asset values and growing concern about how pensions may be treated on death in future, many families are looking for ways to reduce the value of their estate without undermining their own financial security.

For those with surplus income, NEoI can be extremely powerful. But in practice, we’re increasingly seeing people bend their entire investment strategy around it — and in doing so, potentially overlook a far more effective solution.

The Growing Obsession with “Max Income” Portfolios

NEoI allows individuals to make regular gifts out of surplus income that are immediately outside their estate, provided certain conditions are met. In broad terms:

• The gifts must come from income, not capital

• They must be regular

• They must not reduce the donor’s standard of living

When structured and evidenced correctly, this exemption can be invaluable.

However, we are now seeing clients — often prompted by well-meaning articles or generic advice — re-engineering their investment portfolios purely to maximise income. Typical examples include:

• Shifting from total-return portfolios to high-yield equity income funds

• Accepting unnecessary concentration risk

• Paying higher levels of income tax purely to generate “giftable” income

In some cases, the tail is very much wagging the dog.

The Hidden Weakness of NEoI in Practice

NEoI is elegant in theory, but messy in reality.

It relies on:

• Meticulous record-keeping

• Clear evidence of surplus income year after year

• Consistency (even when markets, tax rules or personal circumstances change)

It also works gradually. Assets and growth remain in the estate, leaking out over time via gifted income.

For many families — particularly those with significant estates — this raises an obvious question:

Is there a way to remove income and growth from the estate immediately, without relying on future income patterns?

The “Supercharged” NEoI Many People Overlook

One solution that is frequently overlooked is the Gift and Loan Trust.

While not a replacement for NEoI in every case, it can be thought of as a supercharged alternative.

How it Works (in simple terms)

• A lump sum is placed into trust

• Part is treated as a gift (outside the estate from day one)

• Part is structured as a loan, repayable on demand

• The loan remains in the estate, but:

  • All growth sits outside the estate

  • All income generated is outside the estate

Crucially, this happens immediately, not gradually.

Why This Can Be So Powerful

Compared to relying solely on NEoI:

• There is no need to distort investment strategy just to create income

• Growth is removed from the estate from day one

• There is no reliance on future surplus income

• Record-keeping is significantly simpler

• Investment strategy can remain focused on long-term total return, not yield

For clients who are asset-rich rather than income-rich — or who simply want certainty — this can be a far cleaner solution.

This Isn’t “Either / Or”

To be clear, this is not an argument against NEoI.

Used properly, NEoI remains one of the most effective IHT exemptions available under HMRC rules.

But good generational wealth planning is about using the right tool for the right job — not forcing everything through one exemption because it happens to be fashionable.

In many cases, the most effective planning combines:

• Sensible NEoI gifting where genuine surplus income exists, and

• Trust-based planning to remove future growth and income from the estate in a more decisive way, and

• Outright gifts (either directly or via a trust).

A Final Thought

If your estate planning is starting to dictate your investment strategy — rather than the other way around — it’s often a sign to pause and reassess.