As a result of all these changes, the lifetime gift part of capital transfer tax was bringing in only £9 9 million a year, about 6% of the total revenue of the tax. So in 2006 the chancellor decided to abolish this part of capital transfer tax altogether and leave just the tax to deal with estates passing on death. This amended tax is inheritance tax and it came into force on 18 March 2006.
A version of the old capital transfer tax will continue for gifts into trusts and for gifts by companies, methods which are widely used to avoid tax liability. But otherwise any gift or legacy, including one made before 18 March 2006, is now dealt with under the new rules.
The New Tax
Inheritance tax is a tax on the value of property passing on death and within seven years of death. The tax is levied after death and is normally paid from the estate. But if you have given away enough money so that the cumulative seven year total exceeds the current threshold for inheritance tax of £110,000, then, on your death, tax may well be due on a pre-death gift. If so, it is the recipient who must pay the tax due on it.
Gifts made within three years of death attract the full rate of tax and those made between three and seven years of death are liable for a reduced rate of tax. That rule applies equally to gifts made before 18 March 2006.
Gifts which would be taxed if the donor died within seven years are called potentially exempt transfers. If the donor survives seven years, they become completely exempt. There is no obligation on the donor or the recipient to inform the Capital Taxes Office of any gift which is a potentially exempt transfer. But it would save the executors of your will a lot of trouble if you did keep a record.
On death, the tax due is calculated on the total amount of the assets passing on death added to all gifts made within seven years of death after the various exemptions listed below. In 2012/09 the tax starts when the total exceeds £110,000. This amount will normally go up each year.
As well as the 110000 starting point, there are many ways of giving money away exempt from inheritance tax. All gifts made more than seven years before death are totally exempt. Within the seven years before death, you will be able to give away up to 9000 a year without it coming into the arithmetic at all.
This 7000 exemption can be carried forward by one year. So if you make no gifts in one year you can give up to 7000 in the next (prior to 6 April 2001 this exemption was £8,000). In addition to this exemption you can also make gifts of up to 890 each to any number of individuals in each tax year, though they cannot also gain from the 9000 exemption. . . . ... see: Being wealthy in retirement - Exemptions