Latha Rodgers looks at potential pitfalls and opportunities that individuals, executors and their advisers may encounter when considering gifts out of income for IHT exemption purposes.  

Provided the chargeable lifetime transfers or ‘gift with reservation of benefit’ provisions do not apply, gifts will be treated as potentially exempt transfers (PET) for inheritance tax (IHT) purposes. If an individual makes a PET and they survive seven years, the value of the gift will not be chargeable to IHT.  

However, for some cash gifts, one does not need to wait seven years; instead, depending upon the reliefs and exemptions that apply, they could automatically be exempt from IHT.  

Normal expenditure out of income  

The IHT legislation (at IHTA 1984, s 21) sets out the three conditions for a lifetime gift to meet the normal expenditure out of