Practical planning for the Normal Expenditure Out of Income (NEI) exemption

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Planning essentials

Maintain detailed gifting records

HMRC requires clear evidence that the gifts were made from income. Clients should be encouraged to keep a comprehensive gift log, including:

• Date and amount of each gift
• Recipient and purpose (e.g. school fees, ISA contribution)
• Bank statements showing the source of funds
• Annual income records to demonstrate affordability

A simple spreadsheet or a gifting journal can be invaluable.

Example: A client gifts £5,000 annually to a grandchild’s Junior ISA. She maintains a spreadsheet, attaches copies of ISA statements, and references this in her Will. These records can be used by her executors to support the claim.

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Establish a pattern of giving

To qualify, gifts must form part of the donor’s normal expenditure. While a long history isn’t required HMRC typically expects a clear and consistent intention to make regular gifts, often evidenced over three to four years. This can be demonstrated by:

• Setting up standing orders or scheduled payments
• Documenting the intention to make ongoing gifts (e.g. monthly, annually)
• Ensuring the gifts are consistent in nature and purpose.

Example: A widower receives £45,000 annual pension income. This, along with other income he receives, exceeds his income needs and he gifts £1,000 a month to each of his two children. The gifts are regular and affordable. He sets up standing orders and notes the purpose of the gifts. His bank records and gift log provide strong evidence of a regular pattern of gifting.

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Demonstrate affordability

Donors must retain enough income to maintain their usual standard of living. To support this:

• Prepare an annual income and expenditure summary
• Identify surplus income available for gifting
• Avoid gifts that require drawing on capital

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Prepare executors in advance

Executors claim the exemption on the IHT400 form (Schedule IHT403). To support them:

• Store records securely and inform executors of their location
• Include a letter of intent outlining the gifting strategy
• Involve executors in annual reviews, where appropriate.

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Adviser checklist

• Review clients’ income and expenditure annually to identify surplus income.
• Formalise gifting strategies early—especially for clients funding education or insurance premiums.
• Provide templates for gift logs and letters of intent.
• Educate clients on the importance of maintaining records and preparing executors.
• Coordinate with accountants to ensure income figures are accurate.

Conclusion

The NEI exemption offers a powerful opportunity to reduce inheritance tax, but only if supported by clear planning and robust record keeping. With HMRC scrutiny increasing, advisers who integrate NEI planning into the client review process can deliver significant tax efficiencies, reduce future administrative burdens, and deepen trust by addressing a commonly overlooked exemption.

This article provides general guidance and should not replace tailored professional advice.