Shorter Reads

Normal expenditure out of income

Lifetime transfers that constitute a donor’s ‘normal expenditure out of income’ will pass immediately free from inheritance tax.

1 minute read

Published 26 October 2021

Authors

Share

Key information

Gifts Out of Expenditure

Although lifetime giving can be tax-efficient, inheritance tax will arise immediately if the donor makes outright gifts or transfers into trust in excess of their nil rate band (currently £325,000), and will also arise if the donor fails to survive an outright gift by at least seven years.

However, lifetime transfers that constitute a donor’s ‘normal expenditure out of income’ will pass immediately free from inheritance tax.  The exemption applies if each of three criteria are met:

  • Payments are made out of the donor’s ‘normal expenditure’, meaning that they must be typical of the donor according to a settled pattern of behaviour over time.
  • Payments are made out of the donor’s income (as opposed to capital). HMRC’s view is that the donor’s income is their net income after the payment of income tax.
  • Having made the gift(s), the donor is left with sufficient income to maintain their usual standard of living. This means that a donor can only make gifts under this exemption up to the value of their ‘surplus’ income after payment of normal expenses to maintain their usual standard of living.

The ‘normal expenditure out of income’ exemption can be a highly effective tool for lifetime giving where the donor makes regular, manageable gifts over a period of years.  This might include for example payments for a grandchild’s education or the incremental funding of a trust out of the donor’s surplus income.  It is worth remembering however that if a donor survives outright gifts by at least seven years then the gifts will generally pass free from inheritance tax anyway.

This article is part of a series of lifetime giving articles. Read about charitable giving here.

Message us with any questions

Related latest updates
PREV NEXT

Related content

Arrow Back to Insights

Shorter Reads

Normal expenditure out of income

Lifetime transfers that constitute a donor’s ‘normal expenditure out of income’ will pass immediately free from inheritance tax.

Published 26 October 2021

Associated sectors / services

Authors

Gifts Out of Expenditure

Although lifetime giving can be tax-efficient, inheritance tax will arise immediately if the donor makes outright gifts or transfers into trust in excess of their nil rate band (currently £325,000), and will also arise if the donor fails to survive an outright gift by at least seven years.

However, lifetime transfers that constitute a donor’s ‘normal expenditure out of income’ will pass immediately free from inheritance tax.  The exemption applies if each of three criteria are met:

  • Payments are made out of the donor’s ‘normal expenditure’, meaning that they must be typical of the donor according to a settled pattern of behaviour over time.
  • Payments are made out of the donor’s income (as opposed to capital). HMRC’s view is that the donor’s income is their net income after the payment of income tax.
  • Having made the gift(s), the donor is left with sufficient income to maintain their usual standard of living. This means that a donor can only make gifts under this exemption up to the value of their ‘surplus’ income after payment of normal expenses to maintain their usual standard of living.

The ‘normal expenditure out of income’ exemption can be a highly effective tool for lifetime giving where the donor makes regular, manageable gifts over a period of years.  This might include for example payments for a grandchild’s education or the incremental funding of a trust out of the donor’s surplus income.  It is worth remembering however that if a donor survives outright gifts by at least seven years then the gifts will generally pass free from inheritance tax anyway.

This article is part of a series of lifetime giving articles. Read about charitable giving here.

Associated sectors / services

Authors

Need some more information? Make an enquiry below.

    Subscribe

    Please add your details and your areas of interest below

    Specialist sectors:

    Legal services:

    Other information:

    Jurisdictions of interest to you (other than UK):

    Enjoy reading our articles? why not subscribe to notifications so you’ll never miss one?

    Subscribe to our articles

    Message us on WhatsApp (calling not available)

    Please note that Collyer Bristow provides this service during office hours for general information and enquiries only and that no legal or other professional advice will be provided over the WhatsApp platform. Please also note that if you choose to use this platform your personal data is likely to be processed outside the UK and EEA, including in the US. Appropriate legal or other professional opinion should be taken before taking or omitting to take any action in respect of any specific problem. Collyer Bristow LLP accepts no liability for any loss or damage which may arise from reliance on information provided. All information will be deleted immediately upon completion of a conversation.

    I accept Close

    Close
    Scroll up
    ExpandNeed some help?Toggle

    Get in touch

    Get in touch using our form below.