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HMRC internal manual

Inheritance Tax Manual

From
HM Revenue & Customs
Updated
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Lifetime transfers: normal expenditure out of income: introduction

The exemption under IHTA84/S21 applies where the taxpayer can show that a gift (transfer of value):

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

A gift must meet all of the conditions to qualify for the exemption and must not fall within any of the exceptions. Part of a single gift may qualify for the exemption, the balance being chargeable or being exempt under another provision.

The exemption does not apply to:

  • transfers on death,
  • transfers on the termination of a qualifying interest in possession (IHTM04083) in settled property
  • deemed 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

  • 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

Exemption under IHTA84/S21 does not prevent the gift from being taxed under the gift with reservation (IHTM04071) rules.