IHTM14251 - Normal expenditure out of income: transferor's standard of living

The third condition ( IHTM14231) for exemption contained in IHTA84/S21 (1)(c) 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. Even gifts out of income will not qualify for exemption if the transferor had to resort to capital for living expenses. In deciding if the exemption is applicable, you need to establish

• Was the gift in fact made out of income?
• Could the transferor still live on their income after depleting it by the transfers in question?
• If the questions above cannot be answered in the affirmative, can they be so answered taking one year with another?

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

• However, if the taxpayer requests a longer period than a year to be considered, because for example the transferor had saved surplus income from previous years to make the gifts, you must consider the case on its merits.
• Ignore gifts that are not part of the transferor's normal expenditure.
• Test the condition as if such abnormal gifts have never been made.

Usual expenses

Although the normal expenditure gifts must have left the transferor with “sufficient income” to maintain their usual standard of living, they need not have actually used this for usual living expenses. Do not withhold the exemption because the transferor in fact chose to use part of the sufficient income for some other purpose and lived on part of their capital.

Usual standard

The usual standard of living will generally be the standard prevailing at the time of the transfer. You may still apply the exemption if the transferor has had to lower their standard of living for some extraneous reason, such as the loss of employment or drop in income on retirement.

Limited exemption

IHTA84/S21 (1) includes the wording "or to the extent that". This means that you can give a limited exemption where, if taken together, all gifts would fail the test. For example, if the transferor made a commitment to a series of gifts, but later took on an additional regular commitment resulting in recourse to capital, you may still be able to allow the exemption.

Example

A transferor might have taken on a commitment to paying regular insurance premiums, initially affordable out of income, but later on has to pay nursing home fees, unforeseen when the policy was first effected.

If it is apparent that these fees have subsequently been paid out of the transferor's capital, there is no reason to restrict the exemption. [end of example]

However, if two or more regular commitments, which together were excessive, were undertaken at the same time, only a portion of the gifts would be eligible for the exemption.