Normal Expenditure

Normal Expenditure out of Income


The “normal expenditure out of income” exemption (“the “Exemption”) for lifetime gifts can be an extremely useful tool for those looking to plan for inheritance tax (IHT).

Generally, where a person makes a gift to another person during their lifetime, IHT of up to 40% could be payable on the gift if the transferor dies within seven years of making it (assuming no reliefs or exemptions are available and the value of the transferor’s estate on death is above the nil-rate bands available to it). However, where the Exemption applies, the gift is immediately considered as outside of the transferor’s Estate for IHT purposes.

For the Exemption to apply, the following conditions must be met: –

  1. The gift formed part of the transferor’s normal expenditure; and
  2. The gift was made out of income; and
  3. The transferor must be left with enough income for them to maintain their normal standard of living.

Normal Expenditure

HMRC set out in the Inheritance Tax manual (“the Manual”) that, for this condition to be met, there must be a pattern of giving that is “normal” for the transferor. The Manual provides that factors to take into account when looking at any pattern of gifting should include the frequency and amounts of the gifts, the nature of the gifts, the identity of the receivers of the gifts and the reasons for the gifts. This means that a number of random gifts made by one person may not constitute a pattern whereas one single gift might qualify if it is or is intended to be the start of a pattern and there is evidence of this.

Made out of Income

The Manual sets out that income should be determined for each year in accordance with normal accountancy rules and is net income after payment of income tax. A gift of capital, e.g. a gift pf jewellery or securities, will not qualify unless it was specifically purchased from the transferor’s income with the intention of making the gift.

Transferor’s standard of living

This third condition provides that the transferor, after allowing for all gifts under the Exemption, must have enough income left to maintain their usual standard of living. Even if a person makes gifts from their income, if this means that they have to eat into their capital to maintain their normal standard of living, the gift will not qualify for the Exemption.

Record Keeping

For anyone looking to benefit from the Exemption, it is highly advisable for them to keep an up to date record of their income, their normal expenditure and gifts they make. This evidence may need to be provided to HMRC later on and could be extremely useful to the transferor’s executors.


The Exemption can be extremely valuable to those who are looking to plan for the future and find they are in receipt of surplus income. However, it is important that the transferor considers the above conditions carefully when making gifts out of income and keeps accurate records.

How Pinney Talfourd can help

If you require any advice on Inheritance Tax planning or lifetime giving, then please feel free to make contact with our Private Client team on 01277 211755.

The above is meant to be only advice and is correct as of the time of posting. This article was written by Laura Hotten, Associate in the Private Client Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of July 2024.



Laura Hotten

Laura Hotten


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