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.