Inheritance Tax Act 1984 section 21

Normal expenditure out of income

Section 21 provides an inheritance tax exemption for lifetime gifts that form part of the transferor's normal pattern of expenditure, are made out of income, and leave the transferor with sufficient income to maintain their usual standard of living.

• A gift is exempt from inheritance tax if it forms part of the transferor's normal expenditure, is made out of income (taking one year with another), and leaves the transferor with enough income to maintain their usual standard of living — all three conditions must be met.
• Insurance premium payments linked to a purchased annuity on the transferor's life are excluded from the exemption unless the annuity purchase and the insurance arrangement were genuinely unrelated (i.e. not back-to-back arrangements).
• The capital element of a purchased life annuity that is exempt from income tax is not treated as income for the purposes of this exemption, except for annuities purchased before 13 November 1974.
• The exemption does not apply to transfers on death, transfers on termination of a qualifying interest in possession in settled property, certain deemed potentially exempt transfers, or apportionments to participators from close company transfers.