The Normal Expenditure Out Of Income Exemption

The Normal Expenditure Out Of Income Exemption offers a highly valuable saving on Inheritance Tax if requisite conditions are met and the right records are kept by the transferor ...

When available, any gifts made are immediately considered to be outside of the donor's own estate. There is no upper limit to the exemption if the conditions are met and can apply to lifetime gifts to either individuals or trustees.

The exemption, which is part of the Inheritance Tax Act 1984 and part of section 21 is available if:

- It was made as part of the normal expenditure of the transferor
- It was made out of their income (comparing one year to another)
- After the transfer was made, the transferor as sufficient income to maintain their usual standard of living

HMRC's own Inheritance Tax Manual states that 'normal' includes terms such as 'standard', 'regular', 'typical', 'habitual' and 'usual'. There is no minimum period for gifts, nor is there a number that can be made. HMRC considers a three to four year period to be considered normal.

Records must be maintained for income, spending patterns and gifts made so this evidence could be provided to HMRC should they query the gifts in the seven years preceding death.

When using the Normal Expenditure Out Of Income Exemption, care should be taken to determine the extent of gifts an individual wishes to make are within the scope of the exemption.

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