The rancour over the Budget has overshadowed some very significant changes to capital acquisitions tax (CAT), which primarily comprises gift and inheritance tax.

The family home is now exempt from CAT where it is either the donor's principal private residence and/or the principal private residence of the recipient who has lived in the house continuously for at least three years previously. The recipient may not dispose of the house for at least six years after it is received.

Relations and friends who do not fall into these categories must rely on threshold amounts when calculating tax on an inheritance. The new tax-free cumulative limit on gifts and inheritances received since December 2nd, 1988 from parents is £300,000; from brothers, sisters, aunts and uncles £30,000; the limit for other situations, including partners, is £15,000. There is a new single rate of 20 per cent for all gifts and inheritances. The previous top rate for inheritances was 40 per cent and for gifts, 30 per cent.

For example, John inherits his parents' home, worth £500,000 after December 1st, 1999. He has received no previous gifts or inheritances since December 2nd, 1988. John has lived in the house for more than three years prior to the date of the inheritance. The house is John's principal private residence and he has no interest in another property.

Under the new rules, John is completely exempt from CAT on the value of the residence. However, if John sells the house within six years the exemption will be clawed back and CAT will be calculated under the normal rules. There will be no CAT on the first £300,000 as he is a child but he will pay CAT on the remaining £200,000 at 20 per cent or £40,000.

CAT manager at PricewaterhouseCoopers, Mr Fergus McCarthy, says the reduction in the rate of inheritance-related CAT from 40 to 20 per cent is welcome but it should be noted that the incentive to transfer assets during one's lifetime is reduced given that there is now a single rate for both gifts and inheritances.

Gifts are allowed at £1,000 per year tax free for each individual from each individual disponer. This means a person may receive £1,000 each from a parent, nephew, aunt, cousin or any individual free of tax. However, if they receive the equivalent amount of £5,000 from only one person they must pay tax on £4,000 at 20 per cent or £800.

For information regarding your particular situation, please talk to your tax adviser.