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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Lifetime transfers: conditions for normal out of income exemption: pattern of gifts

Some cases present a complex picture with regular gifts, one-off gifts, capital gifts and different interwoven habits. You will need to analyse these cases carefully to determine whether a pattern, or patterns, exists and which gifts form part of which pattern.

You must leave out of consideration any gift clearly made for some special purpose.

There is no set time span over which the taxpayer must show the pattern of giving. A reasonable span would normally be three to four years. However, you can consider a longer period if this helps the taxpayer to illustrate the gifts were ‘normal’ (IHTM14243).

A pattern is more difficult to identify where a single gift is involved - particularly if this is made close to the date of death. The taxpayer or agent must provide strong evidence in such cases that the gift was genuinely intended to be the first in a pattern and that there was a realistic expectation that further payments would be made. If a single gift is also said to be made from accumulated income rather than the available income of the year in which it was made you should refer the case to Technical.

A single gift by way of payment under a deed of covenant or other regular commitment, such as payment of the first of a series of premiums on a life policy may be accepted as normal. On the other hand there may be an indication that the gifts were never intended to continue from the outset.

For example:

  • Some life policies provide that after payment of the first premium the policy may be converted into a fully paid one.
  • A policy may also be taken out when the transferor’s expectation of life was very short.

In either of these cases, any gifts could not be regarded as normal expenditure.

Lifetime cases

In rare cases, the exemption may need to be discussed during the transferor’s lifetime, for example where a gift is made into trust and would be an immediately chargeable lifetime transfer if the exemption was not available. If, within the principles outlined above, the taxpayer asserts that a first gift is part of an intended series, you can allow the exemption provisionally in the first instance. Make it clear that HMRC proposes to review (and if appropriate disallow) the exemption by reference to the transferor’s future gifts if any.

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Example

In the four years before his death, Peter made gifts from his income of £1,000 to each of his three children on their respective birthdays and £500 to each child at Christmas. He also paid regular monthly premiums of £100 into a life policy written in trust for the benefit of his wife. In the same period, he gave his eldest child £20,000 to pay off her debts and gifted 5000 shares, representing a 50% interest in a company, to his sister who already held the other 50% interest.

The birthday and Christmas gifts form a pattern of giving as do the life policy premiums, so these are exempt. The one-off gift of cash to the eldest child is not exempt as it does not fall within a pattern. The gift of shares is not exempt as it is a gift of a capital asset and also not part of a pattern of giving.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)