Sam Hart points out that, when used correctly, the ‘normal expenditure out of income’ exemption can be very effective at reducing inheritance tax exposure.
Normal expenditure out of income is one of the ‘unsung heroes’ of UK inheritance tax (IHT). It is often misunderstood, occasionally overlooked and sometimes misapplied.
At its simplest, normal expenditure out of income allows a taxpayer to make gifts during their lifetime, funded out of surplus income, without those gifts being treated as potentially exempt transfers for IHT purposes. Instead, gifts under these provisions are simply exempted from IHT such that the seven-year ‘tail’ does not apply.
That said, it is often (but not always) counterintuitive to generate large sums of income taxable at up to 45% (for 2026/27), in
