The normal expenditure out of income exemption is one of the most effective, yet underused, inheritance tax exemptions. If the taxpayer makes payments (or intends to make payments) on a regular basis out of income, and those payments do not affect the taxpayer’s usual standard of living, those payments will be free of inheritance tax. It should be noted that withdrawals from investment bonds are not treated as income for these purposes, and this extends to payments made to the settlor from a loan trust or discounted gift trust.
