A light shone on the limits of the IHT gift rule
The normal expenditure out of income exemption allows individuals to make gifts during their lifetime that are immediately exempt from inheritance tax (IHT) – there is no seven-year wait. A recent case heard by the First-tier Tribunal (FTT) has cast some light on what is meant by ‘normal expenditure’.
Exemption
To be covered by the exemption, gifts must:
-
be made as part of the individual’s normal expenditure;
-
be made out of income; and
-
leave the individual with sufficient income to maintain their usual standard of living.
The income aspect might be considered straightforward, but this is not always the case. There is no statutory definition, and income is not necessarily the same as income for tax purposes. It will, for example, include non-taxable income, such as income from individual savings accounts (ISAs). HMRC considers income to become capital after it has been accumulated for a period of two years.
‘Usual standard of living’ will generally be what was usual for the individual at the time the gift was made. Exemption may, therefore, not be lost where an individual makes a regular commitment, at a time when surplus income was available, but then has to lower their standard of living for another reason, such as redundancy.
Normal expenditure
The case heard by the FTT was only concerned with whether the gifts made by the taxpayer were normal expenditure. To count as normal, gifts must be habitual or regular, but do not have to be a fixed amount.
Although the taxpayer had made many substantial charitable donations, HMRC took issue with donations to campaigns supporting the UK leaving the EU. Exemption for these donations was denied because they were made over a period of just nine months, which was not sufficient time to establish a settled pattern; there was no predictability to the donations. What is more, there was no particular reason for the financial amount given to each gift.
A settled pattern would normally mean gifts being made over three to four years, but a single gift might qualify if there is evidence that it was intended to be the first in a pattern.
Detailed guidance on the normal expenditure out of income exemption is available in HMRC’s internal manuals: IHTM14231 to IHTM14255.
For further information, contact LFB on
House prices versus inflation
Bricks and mortar are not always a sure-fire winner.
From January 2016 to January 2026, did house prices grow faster than inflation? The answer is in the graph below.
Source: Nationwide, ONS
Nationwide Building Society says the average UK house price in January 2016 was £196,829. Ten years later, it had risen to £270,873, a 37.6% increase. Over the same period, the Consumer Prices Index (CPI) increased by 40.2%.
If the result is not what you expected, it could be because you remember the unexpected boom during and immediately after the Covid-19 pandemic, but forgot the somewhat turgid period for house prices that followed. In the three years from January 2023, the average house price rose by 4.9%, while the CPI added 10.4%.
Ironically, some of the recent slowdown in house price growth is linked to general inflation. One factor that put the brake on house prices was the increase in interest rates made by the Bank of England to bring down inflation (which peaked at over 11% in October 2022). Until June 2022, the Bank of England’s rate was no more than 1%. As anyone facing the imminent expiry of a five-year fixed rate mortgage knows, the Bank’s action on interest rates, now compounded by the war in Iran, has made borrowing considerably more expensive than half a decade ago.
The near-flatlining of house prices and, until recently, cuts to mortgage rates did make life marginally easier for first-time homebuyers. That has not been good news for one group of existing property owners: buy-to-let investors. Zoopla, the property website, reported that at the start of the year, average enquiries per rental property were at their lowest level since 2019 and down a fifth on January 2025. Reduced demand has translated into slowing rental growth, which has come down from 7.8% annual growth in January 2025 to 3.1% a year later, according to data from the Office for National Statistics (ONS). In England, buy-to-let investors are also facing the implementation of the Renters’ Rights Act, which from 1 May 2026 will put an end to no-fault evictions (‘section 21 orders’).
Buying and owning your own home generally remains a sensible move, but be wary of treating it as the only investment you need to make.
Read more on private rent and house prices from the ONS here.
For further information, contact LFB on
