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Normal Expenditure out of Income Exemption


This exemption applies where the taxpayer can show that a gift (transfer of value) meets all three of the following conditions:

1) It formed part of the transferor’s normal expenditure,
2) It was made out of income, and
3) It left the transferor with enough income for them to maintain their normal standard of living.

What is ‘normal’?

The dictionary definition of ‘normal’ includes standard, regular, typical, habitual or usual. For the purpose of this exemption, ‘normal’ means normal for the transferor and not for the average person. In most cases, it will be clear whether or not there is a pattern of giving, but it is not always that simple.

It is possible that a number of gifts made by one person may not qualify. It is also possible for a single gift to qualify if it is or is intended to be the first of a pattern and there is evidence of this. You will need to analyse all the facts in cases of doubt to see if a pattern can be found.

Factors to take into account in looking at any pattern of gifts include the frequency and amounts, the nature of the gifts, the identity of the donees and the reasons for the gifts.

What is classed as ‘income’?

Income is not defined under the legislation but should be determined for each year in accordance with normal accountancy rules. It is not necessarily the same as income for income tax purposes. Income is the net income after payment of income tax.

It is usually clear whether payments received are income in nature. Common sources of income are employment and self-employment, rents from property, pensions, interest and dividends. But, it is possible that payments received on a regular basis may appear to be income but are in fact capital in nature. An example would be receipts from a discounted gift scheme.

Period in which gifts out of income are made

Although HMRC do not specify for how long you should make the gifts in order to benefit from the inheritance tax exemption, HMRC have advised that a reasonable period in which to make regular gifts out of income would normally be three to four years. It is possible that a single gift may qualify for the exemption if it is or is intended to be the first gift of a pattern and there is evidence of this. For example, setting up a standing order would be a simple way of proving your intention to make regular gifts.

Income becoming capital

You also need to be careful that your excess income, from which you make any gifts, has not accumulated and become capital. HMRC tend to take the view that income is deemed to have become capital after two years. You should therefore be careful not to make gifts out of income that you have had for at least two years.

Maintaining your ‘standard of living’

The third condition for the exemption is that, after allowing for all gifts forming part of their normal expenditure, the transferor must have been left with enough income to maintain their usual standard of living. For example, gifts, even if made out of income, will not qualify for exemption if you have to resort to capital to meet your normal living expenses.

To decide if the exemption applies, you need to establish:

  • whether you could meet your normal living expenses from your income after reducing it by the transfers in question in that year, and
  • if not, if you could do so by taking one year with another

In practice, you should consider what is current income and expenditure on an annual basis using the accounting year to 5 April.

Claiming the exemption

On your death, your executors would make a claim to HMRC in which they would set out the gifts out of your excess income that should not be subject to inheritance tax. HMRC would then consider whether the exemption would apply to those gifts.

It is important to be aware of the points that HMRC would consider when a claim for the exemption is made. These include:

  • Details of all gifts made over a representative period;
  • Details of your net income in the relevant years. This would be calculated after taking into account a number of items such as income received from investments that you had and the income tax that you paid in each tax year;
  • Details of your usual living expenses for the relevant years, such as insurance, household bills, travelling costs, entertainment, holidays and care home fees.

Obviously your income and expenditure may vary year on year. In order to strengthen the claim to HMRC therefore, you should maintain a document setting out your intention to make regular gifts from your surplus income and how this would be done. On your death, your executors could then present this to HMRC as further evidence.

In order to prove that your gifts were regular, as well as setting up a standing order (mentioned above), it may also be worth recording your intention to review the surplus income figure every three to six months and in the event that your circumstances change.

Where the exemptipon does not apply

The exemption does not apply to the following transfers of value:

  • transfers on death;
  • transfers on the termination of a qualifying interest in possession in settled property;
  • transfers that are treated as potentially exempt transfers (PETs); and
  • apportionments made to persons (including transfers by close companies).

Nor does it apply to transfers that are:

  • the payment of premiums on a life policy where these are linked to an annuity; and
  • transfers of capital assets unless, exceptionally, these were purchased from income for the specific purpose of making the gift and they meet the other conditions.


This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.