IHTM14231 - Normal expenditure out of income: introduction

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

• It formed part of the transferor’s normal expenditure (IHTM14241),
• It was made out of income (IHTM14250), and
• It left the transferor with enough income for them to maintain their normal standard of living (IHTM14251).

The exemption is given under IHTA84/S21. Part of a single gift may qualify for the exemption and the other part of the gift might be chargeable to tax or might be exempt under another provision.

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

• transfers on death,
• transfers on the termination of a qualifying interest in possession (IHTM04083) in settled property
• transfers that are treated as potentially exempt transfers (PETs) (IHTM04064) under FA86/S102 (4) and FA86/S103 (5) (property ceasing to be subject to a reservation and treatment of certain debts)
• apportionments made to persons under IHTA84/S94 (transfers by close companies (IHTM14851))

Nor does it apply to transfers that are

• the payment of premiums on a life policy where these are linked to an annuity (IHTM14235)
• 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

Gifts with reservation of benefit (GWRs)

If a transfer qualifies for the exemption under IHTA84/S21 the gift which constitutes the transfer may still be taxed under the GWR (IHTM04071) rules.