A Tale Of Two Donors: Brexit And The Boundaries Of Normal Expenditure

Two recent cases, Wood v HMRC¹ and Hosking v HMRC² , dealing with the inheritance tax normal expenditure out of income exemption, have been heard before the First-tier Tribunal (FTT). 

This exemption has had little court treatment to date, so these decisions provide helpful insight into the tribunal’s treatment of the relief. The judgments reinforce that for the exemption to apply there must be a settled pattern of giving, involving (in the absence of other factors) a level of regularity and predictability in terms of gift amounts, and it is not enough to show that there is some common general character to the relevant gifts.

What is the normal expenditure out of income exemption?

The normal expenditure out of income exemption is an important but often overlooked relief from inheritance tax, set out in s. 21 Inheritance Tax Act 1984 (IHTA). 

Gifts are exempt from inheritance tax under this exemption if they meet a three-limb test:

1. the gift is part of the normal expenditure of the taxpayer; 
2. the gift is made out of the taxpayer’s after-tax income; and
3. after the transfer, the taxpayer is left with sufficient income to maintain their usual standard of living.

In essence, where a taxpayer makes a series of regular gifts out of income during their lifetime, and can demonstrate that after making these gifts they have sufficient income remaining to maintain their normal standard of living, the gifts will be exempt from inheritance tax.

To claim the relief, it is important to keep records of the gifts, so as to establish that there is some sort of pattern to the giving (or at least the intention to make regular gifts). This was one of the key issues at stake in Wood and Hosking.

Wood and Hosking: The background

Each case dealt with the assessment of inheritance tax on substantial gifts to political organisations, largely associated with the Brexit campaign. 

In both cases, Mr Hosking and Mr Wood were wealthy individuals who regularly donated to various charitable and political causes. In Mr Hosking’s case, he made 15 donations to four recipients between March 2011 and October 2016. Mr Wood made nine donations to four recipients between January 2011 and November 2019.

For both taxpayers, the donations varied considerably in amount and were made intermittently, often when requested by the relevant organisation, rather than being part of a noticeable pattern.

The pleadings

In both cases, each taxpayer argued that their donations should be exempt from inheritance tax under s. 21 IHTA. Each taxpayer also presented an alternative pleading: Mr Hosking asserted that his gifts were exempt under s. 24 IHTA (gifts to qualifying political parties), when construed so as to conform with the European Convention on Human Rights, and Mr Wood argued that his donations should not be taxable under s. 10 IHTA, as they were not intended to confer a gratuitous benefit. However, in each case, the alternative argument was rejected, and this article focuses on the conclusions reached regarding the normal expenditure out of income exemption.

The judgments

In both cases, the main issue at stake was whether each relevant donation was made as part of the “normal expenditure” of the taxpayer.

The FTT confirmed that, following the leading judgment in Bennett and others v IRC [1995] STC 54, a gift will be normal expenditure only if it forms part of “a settled pattern of expenditure” adopted by the taxpayer, which can be established in two ways: (1) examining the taxpayer’s expenditure over a period of time; or (2) the taxpayer assumes a commitment or firm resolution regarding their future expenditure, which is then complied with in making the relevant gifts. In assessing the above: 

• there is no fixed minimum period for the payments to be ‘normal’, provided that ‘on the totality of the evidence’ the pattern of expenditure is established and the payments conform with that pattern;
• the amount of the gifts need not be fixed, provided there is a ‘sufficient…formula or standard’ that has been adopted; and 
• it is not necessary that each recipient is the same, provided there is a ‘general character or the qualification for benefit is established’.

In both cases, the FTT concluded that there was insufficient evidence that the taxpayers had assumed a commitment regarding their future expenditure. In each case there was a lack of any written record evidencing a future plan as to expenditure, which is key in such cases, and Mr Wood expressly denied having made any firm resolution to make the donations. Accordingly, the FTT looked instead at the donors’ expenditure over time, to ascertain whether the relevant gifts formed part of a settled pattern. 

In each case, although the FTT found that the relevant gifts could be said to share a common general character (e.g. in Hosking, with one exception, the donations were made to organisations which supported the Leave campaign, and in Wood, various groupings of the payments were advanced by the taxpayer), the tribunal concluded that this of itself was not enough to point to a settled pattern. Following the principles set out in Bennett, where the donations were not of a fixed amount, there must be a “formula or standard” used to quantify the donations. In both cases this was lacking: the amounts varied significantly and often matched what was requested by the donee organisation. In both cases, neither taxpayer came close to spending their surplus income on donations in any given year and neither taxpayer suggested “any other ‘formula or standard’ that he used to determine how much he would donate in a year and to whom”. As such, the FTT concluded that a “formula or standard” was not established in each case.

There was also no predictability or regularity to the payments. In Wood, the timescales between payments were variable (from years to days) and in Hosking, the gifts (excluding an outlier donation in 2011) were concentrated within a period of less than nine months, which was insufficient to establish a settled pattern. In both cases, the donations were made on an ad hoc basis, whenever the taxpayers were approached for donations and their cash resources allowed. As Mr Wood expressed: “there is no exact science”, “I can’t decide when the campaigns happen…I can only give when the need arises”. 

On this basis, the FTT concluded that the relevant donations did not constitute “normal expenditure”, meaning that the exemption in s. 21 did not apply.

Conclusion

These decisions reinforce the need to establish a settled pattern of giving to claim the s. 21 exemption. For these purposes, where a firm commitment or resolution to making gifts is lacking, it is not enough to show that there is some common general character to the relevant gifts; it must be established that there is a level of regularity or predictability in terms of their number, frequency and amount (and where the amount is not fixed, there is some formula or standard used to calculate the amounts).

For practitioners, these cases also underscore the importance of contemporaneous documentation. In Hosking, Mr Hosking had no contemporaneous records or correspondence detailing his commitment to providing financial assistance to the Leave campaigns. In Wood, Mr Wood expressly and repeatedly denied having made any firm commitment or resolution to make the donations. In both cases, the absence of any written record evidencing a future plan as to expenditure was a significant factor in the FTT's conclusion that the exemption did not apply. Clients who wish to rely on the s. 21 IHTA exemption should therefore be advised to document their intended pattern of giving at the outset and to maintain records demonstrating how each gift conforms with that pattern.

Whilst these are only first instance decisions (and were heard by the same tribunal judge), they are likely to be of persuasive value due to the relatively limited consideration of s. 21 IHTA by the courts to date.

Footnotes

1: Jonathan Wood v HMRC [2026] UKFTT 589 (TC)

2: Jeremy Hosking v HMRC [2026] UKFTT 406 (TC)

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