From: Ronald Raygun 
Subject: Re: Are cash gifts taxable?
Newsgroups: uk.finance
Date: Thu, 12 Feb 2004 19:43:30 GMT

Robert Laws wrote:

> Ronald Raygun  wrote
>> 
>> This "sliding scale" stuff is widely misunderstood.  If a gift of £255k
>> is made and the donor dies 6 years later, leaving a further £255k, most
>> people think the 2nd lot of £255k is exempt, and tax due on the first
>> £255k is tapered down to a fifth, resulting in an IHT bill of £20.4k,
>> but in fact it's the first lot that's exempt, leaving the whole of the
>> second lot taxable at the full 40%, resulting in a bill of £102k.
> 
> Yes this is widely misunderstood and widley (even in books) explained
> incorrectly.   The IHT people choose to take the earliest gifts off
> the nil band first and as it's the tax that's tapered not the gift the
> taper is applied to the zero tax.
> 
> But, where in the various acts of parliament does it say that they can
> choose to offset the gifts in that order?  Did they simply decide to
> do it that way?   In many cases the taper is completely useless.  It
> only have any effect if the gifts total more than the nil band.

I've no idea where it says so, but I'm sure it must do.  The IR don't
have the power to make up such potentially contentious rules off their
own bat without statutory authority.

Its probably in the Inheritance Tax Act 1984.
Unfortunately HMSO online goes back only to 1988.