What is the normal expenditure out of income exemption?
This exemption makes regular gifts from surplus income immediately free of inheritance tax, with no upper limit and no seven-year wait. The gifts must form a pattern, be made from income rather than capital, and leave the giver's usual standard of living intact.
It is the most valuable and least used exemption in the regime. Someone with substantial pension income they do not need can move meaningful sums out of their estate every year, with the gifts effective from the moment they are made.
All three conditions must hold. A pattern can be established by a documented intention as well as by repetition, so a first gift can qualify if the intention is recorded. Income means income in the normal sense, after tax — not capital dressed up, and not accumulated income that has become capital over time.
It succeeds or fails on evidence. Executors have to complete an income and expenditure schedule on form IHT403 covering the relevant years, and HMRC scrutinises these claims. A one-page annual record of income, outgoings and gifts made is what turns a plausible claim into an accepted one.