IHTM14250 - Normal expenditure out of income: out of income

The second condition ( IHTM14231) for exemption is that the transferor should have made the gift out of their income. Thus a gift of jewellery or securities does not qualify unless it was specifically purchased by the donor with the intention of making the gift.

Repeated renunciations of bonus issues of shares do not qualify for exemption, although purchases of rights issues in the names of donees may do so.

Current income

Income is considered to refer to current income. Gifts will not normally satisfy the second condition if made from a source which, although originally income, has by retention over a period of time acquired the nature of capital. The fact that the retained income has been invested or saved in a form that itself yields income will normally show that it has become capital. However, invested sums may remain income if the transferor was merely saving them temporarily in order to accumulate an amount sufficient for some expenditure specifically contemplated.

• Often the taxpayer will try and claim gifts made out of several years of accumulated income, which you should resist. It is however a contentious area and you should seek the advice of Technical Group before becoming entrenched.

If a gift is made out of a current account you need not question whether it was in fact made out of income, even though the account included capital receipts or could itself be said to be capital as representing accumulated income. It is enough that the gift could have been made out of income.

You should consider income as net income after payment of income tax. Income is not defined but should be determined in accordance with normal accountancy rules; it does not necessarily coincide with income for income tax purposes.

Annuities

The capital element in a life annuity within the meaning of Taxes Act 1988 S657 ( IHTM20631) purchased on or after 13 November 1974 is not regarded as part of the transferor’s income for the purposes of the exemption.

Fluctuating income

The words "taking one year with another" in IHTA84/S21 (1)(b) are intended to meet the situation where income fluctuates, and in order that the income test can be satisfied and the exemptions afforded to what is otherwise a normal gift, it is permissible for income to be carried over from year to year.

If the taxpayer seeks to carry forward more than one year's income, refer to Technical Group.

Lifetime care plans

It is becoming increasingly popular for individuals to provide for the expense of nursing or residential care by purchasing a specially designed plan. These plans, which may be described as lifetime care plans or immediate care plans, are purchased with a single capital payment in consideration of which the plan provider pays the care fees direct to the nursing home on a periodical basis.

Our view is that the payments by the plan provider are not income for the purposes of IHTA84/S21 (1)(c) but are effectively a return of part of the capital originally provided by the purchaser. However, the nursing home fees are part of the deceased’s normal expenditure for the purposes of S21(1)(c).

If the taxpayer claims that part of the payment represents income produced by the unused part of the premium while it is held by the plan provider, you should obtain a copy of the plan together with details of the original premium and the payments made by the plan provider and refer the matter to Technical Group.

(This text has been withheld because of exemptions in the Freedom of Information Act 2000)