How to Reduce your Inheritance Tax bill

Hundreds of thousands of households are at risk of paying inheritance tax (IHT). The much-hated tax is charged at 40 per cent on the value of your estate over the nil-rate band threshold – £325,000 for an individual and £650,000 for a married couple.

Once you factor in the family home, holiday properties, buy-to-lets, savings and investments, many people’s estates are now over this limit.

But there are ways to escape IHT and a few simple steps could ensure that your heirs pay nothing. Here we explain how.

Make a plan

Make sure you plan ahead , many families do not start thinking about IHT planning until it is too late, so the first thing to do is to work out if the tax will be an issue.

Get married

IHT is not payable when an estate passes between a husband and wife, or from one civil partner to another. Even better, married couples or civil partners can transfer the unused element of their Inheritance Tax free allowance to their spouse when they die.

A couple would escape tax on £650,000 by doubling up the allowance this financial year. In April 2010, when the nil-rate band threshold rises to £350,000, a married couple would escape tax on £700,000.

Give away assets

Giving away assets during your lifetime is a simple and legitimate way to take the sting out of death duties, as long as you do it in time. You can gift up to £3,000 a year and it is immediately exempt from IHT, or £6,000 if you did not make a gift of this kind in the previous tax year.

Live for seven years

It is possible to make further tax-free gifts known as potentially exempt transfers (Pets), but you have to survive for seven years after making the gift.

If you die within seven years and the gifts are valued at more than the nil-rate band threshold, you apply taper relief. The tax reduces on a sliding scale if the gift was made between three and seven years earlier.be there, you have to pay a market rent, which can wipe out the tax benefits.