Glossary · UK
What is Normal Expenditure Out of Income?
An Inheritance Tax exemption for regular gifts made from surplus income that do not reduce the giver standard of living.
Full Definition
Normal expenditure out of income is one of the most valuable but underused Inheritance Tax exemptions. Gifts that meet its conditions are immediately exempt, with no seven-year survival period and no monetary cap. Three conditions must all be satisfied. First, the gift must form part of the donor normal expenditure, meaning a regular or habitual pattern of giving, such as monthly contributions to a grandchild ISA or payment of school fees. Second, the gift must be made out of income rather than capital, so it cannot come from savings, sale proceeds or the surrender of an investment bond. Third, after making the gifts the donor must be left with enough income to maintain their usual standard of living. Income for this purpose is net of tax and normal living costs, and surplus income can accumulate for a reasonable period before being given away. The exemption sits alongside the 3,000 annual exemption and the small gifts and wedding gift exemptions, and can be used in addition to them. Executors must claim it after death, so donors should keep clear records, ideally a schedule of income, expenditure and gifts, to satisfy HMRC that all three conditions were met.