IHT Normal Expenditure Out of Income Calculator

Under IHTA 1984 s.21, gifts made from surplus income are completely exempt from IHT — there is no monetary limit and no 7-year waiting period. The exemption requires: (1) the gift was part of normal (habitual) expenditure, (2) it was made out of income (not capital), and (3) after the gift you retained enough income to maintain your normal standard of living.

All forms of income count: employment income, pension, dividends, rental income, savings interest, annuity income, trust income, and any other regular income. Capital gains, maturing bonds, or inheritance receipts are not income and cannot support the exemption.

Habitual means the gifts form a regular pattern — same recipient, regular frequency (annual, monthly), and consistent amounts. A three-year pattern of gifts is generally sufficient to establish habit, but HMRC has accepted shorter periods if a clear intention was established from the start.

HMRC form IHT403 (Gifts and other transfers of value) asks executors to demonstrate the exemption. Keep annual records of: all income sources (bank statements, P60, dividend statements), all normal expenditure, and the gift amounts and dates. Your solicitor or financial planner can help create an annual 'IHT letter' documenting the position.

Generally, no. Large one-off gifts are not 'normal' expenditure. However, a large regular premium payment (e.g., into a life insurance policy written in trust) can qualify if it is funded from a clearly identified income surplus on a regular basis. The gift must be capable of repetition.

Yes. One of the most common uses of this exemption is paying premiums on a whole-of-life or term insurance policy written in trust. If premiums are regular, paid from surplus income, and the policy is in trust (outside the estate), the premiums are exempt and the policy proceeds are not in the estate.

Executors must claim the exemption on IHT403 and provide supporting evidence. HMRC can open an investigation if they doubt the conditions are met. Without adequate records, the exemption may be lost, adding potentially large IHT liabilities plus interest. Maintain evidence from the start of the gift pattern.

Yes. The normal expenditure out of income exemption and the £3,000 annual gift exemption are separate and can both be used in the same year. The £3,000 exemption covers gifts from capital as well as income; the normal expenditure exemption is unlimited but requires income funding.