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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Excepted transfers and terminations - operation of the regulations with normal expenditure out of income exemption

A chargeable transfer (IHTM04027) is a transfer of value (IHTM04024) which is not an exempt transfer (IHTM04026). Thus, if a transfer of value is wholly covered by an exemption, it is an exempt transfer and does not need to be reported.

This can easily be determined in the case of the annual exemption (IHTM14141) or other unconditional exemptions; but the position is not so straightforward in the case of the normal expenditure out of income exemption (IHTM14231) where the exemption is only available “…….to the extent that it is shown……” that the exemption applies. And we interpret “shown” as meaning “shown to the satisfaction of HMRC”. It follows therefore that where normal expenditure out of income exemption is in point, a transfer of value remains a chargeable transfer unless and until it is shown to be exempt.

This requirement to “show” that the exemption is available may suggest that it is necessary to deliver an account in all cases so that the exemption may be agreed. This will defeat the purpose of the regulations. You should therefore adopt the position below.

Where denial of the exemption would not breach the limits for a cash transfer (IHTM06103), there is no need for an account to be delivered. We will consider whether the exemption is due if & when the matter is material when a later transfer is made or on death.

Where denial of the exemption - either in respect of a single gift (whether it is the first of a planned series of gifts or a gift within a series) or cumulatively taking into account earlier transfers - would mean that there is a liability to IHT, an account should be delivered so that the availability of the exemption can be agreed.

Example

The transferor makes a number of gifts of £50,000 cash annually to the trustees of a relevant property trust which they consider qualifies for exemption as normal expenditure out of income. No other exemptions are available and no other transfers made. No account will be necessary until the cumulative total of the value transferred by all the transfers of value exceeds the nil rate band - which at current levels would mean not until the seventh transfer is made.

Example

The transferor makes a transfer of land into trust valued at £200,000, and they then transfer £25,000 cash per year for 3 years into the trust which they consider qualifies for exemption as normal expenditure out of income, followed by another transfer of land of £40,000. No other exemptions are available. With a nil rate band at £300,000, if the cash transfers are exempt as normal expenditure out of income, the second transfer of land will be an excepted transfer as the cumulative total of chargeable transfers does not exceed 80% of the nil rate band. If they are not exempt (and therefore chargeable) they themselves would qualify as excepted transfers (being transfers of cash with a cumulative total of chargeable transfers below the nil rate band); but the nil rate band left available to the transferor at the time of the second transfer of land would only be £25,000. As the transfer of value exceeds this (IHTM06104) an account should be delivered for the transfer of land - and that account should make reference to all the earlier transfers so the position can be agreed.