HMRC internal manual

Inheritance Tax Manual

IHTM14255 - Lifetime transfers: conditions for normal out of income exemption: transferor's standard of living

The third condition (IHTM14231) for exemption contained in IHTA84/S21(1)(c) is that, after allowing for all gifts forming part of their normal expenditure, the transferor must have been left with enough income to maintain their usual standard of living. Gifts, even if made out of income, will not qualify for exemption if the transferor had to resort to capital to meet their normal living expenses,

You may find it useful to consider this third condition alongside the second requiring the gift to be made out of income. To decide if the exemption applies, you need to establish:

  • whether the transferor could meet their normal living expenses from their income after reducing it by the transfers in question, in that year, and
  • if not, if they could do so by taking one year with another

In practice, you should consider what is current income and expenditure on an annual basis using the accounting year to 5 April.

However, if the taxpayer requests a longer period than a year to be considered, because for example the transferor had saved surplus income from previous years in order to make the gifts, you must consider the case on its merits.

You should ignore gifts that are not part of the transferor’s normal expenditure and test the condition as if such abnormal gifts have never been made.

Sufficient income

Although the normal expenditure gifts must have left the transferor with ‘sufficient income’ to maintain their usual standard of living, they do not need to have actually used this for living expenses. The transferor may in fact choose to use capital to meet their living expenses and use the income remaining, after making the gifts, for some other purpose. It is enough, for the exemption to apply, that the income was enough to meet both the normal expenditure gifts and the usual living expenses.

If the income that is left after making the gifts is not enough to meet the usual living expenses, the exemption is not available in full, but part of the gifts may still qualify for the exemption.

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Usual standard

The usual standard of living will generally be what was usual for that transferor at the time the transfer was made.

If the transferor has had to lower their standard of living for some other reason, such as the losing their job or a drop in income on retirement, the exemption may not be completely lost if they had made a regular commitment at an earlier date when surplus income was available. For example, the transferor may have taken on a commitment to pay regular insurance premiums, initially affordable out of income, but later on has to pay nursing home fees, that were unforeseen when the policy was first taken out. But, a commitment made at a time when the fall in income could be foreseen would not qualify.