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The Little Used Exemption with Big Potential Benefits

May 14th 2020 – Written by Andrew Chorley

The Inheritance Tax, normal expenditure out of income exemption is often forgotten when it comes to Inheritance Tax but it has big potential uses and benefits. Created by Section 21 of the Inheritance Tax Act 1984 it means that an exempt gift can be made if each transfer meets three conditions.

  1. It formed part of the transferors normal expenditure
  2. It was made out of income (taking one year with another), and
  3. It left the transferor with enough income to maintain his/her standard of living.

Individuals net income could be from employment, self-employment or rental income for example – it is important that the person making the gift thought does not need to restore their income from capital. Good record keeping of both regular income and expenditure is crucial during an individuals lifetime as a claim needs to be made to the HMRC by the deceased executors.

It is crucial to take advice when considering this approach and it should be as part of an overall strategy for Inheritance Tax Planning but assuming that the conditions are met this strategy could be a great way to help future generations – look at the difference that a £200pm gift could make to a mortgage.

  1. Mortgage of £150,000 on a repayment basis over 20 years at a rate of interest of 3%
  2. A regular overpayment of £200 makes a huge saving in time and interest
  3. Mortgage is repaid around five years earlier
  4. Interest reduces from £49,655 to £36,646 a whopping saving of £13,000!



EST. 1999