5(1)A transfer of value is an exempt transfer if, or to the extent that, it is shown—
(a)that it was made as part of the normal expenditure of the transferor ; and
(b)that (taking one year with another) it was made out of his income ; and
(c)that, after allowing for all transfers of value forming part of his normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living.
(2)A payment of a premium on a policy of insurance on the transferor's life, or a gift of money or money's worth applied, directly or indirectly, in payment of such a premium, shall not for the purposes of this paragraph be regarded as part of his normal expenditure if, when the insurance was made, or at any earlier or later time, an annuity was purchased on his life, unless it is shown that the purchase of the annuity and the making or any variation of the insurance or of any prior insurance for which the first-mentioned insurance was directly or indirectly substituted, were not associated operations.
(3)Where a purchased life annuity (within the meaning of section 230 of the Taxes Act) was purchased after 12th November 1974 then, in relation to transfers of value made after 5th April 1975, so much of the annuity as is, for the purposes of the provisions of the Tax Acts relating to income tax on annuities and other annual payments, treated as the capital element contained in the annuity, shall not be regarded as part of the transferor's income for the purposes of this paragraph.