Saving Inheritance Tax

Make a will

One in three of us will die without making a will, says the Law Society, usually because we assume everything will go to our spouse. It doesn't, which means anything you leave to other people could still be taxed. It is also useful to keep records of the values and dates of any gifts of cash or assets you make.You don't need stacks of paperwork – just dedicate a drawer in a filing cabinet or keep a document on your computer.

Make cash gifts

Gifts made more than seven years before you die are free of IHT, as long as you don't retain any benefit, such as continuing to live in a house you have given away. Everyone has a set of small annual gift allowances, too.

The earlier you start planning, the more options are open to you.

Everyone is entitled to gift away £3,000 a year – which will be exempt from IHT – and spouses have separate allowances meaning a couple can offload £6,000 in each tax year. Gifting can be an extremely effective IHT planning tool but only if you begin early. Leaving it too late reduces the options and may force you to take more drastic remedial action.

You may give up to £5,000 to each of your children when they marry and any number of gifts up to £250 may be made. Regular gifts from income, which do not reduce your standard of living, are also exempt.

Tidy up life policies

Write any life insurance policies you have into trust to make sure they are paid out free of IHT after your death. While pension policy providers usually set up pension funds in trust automatically, you have to ask for this to be done by life insurance providers. Most insurers have standard documentation.

Discretionary will trusts

Married couples automatically combine their IHT allowances on the death of the first person. When the second member of the couple dies, twice the nil-rate band at that time is applied to the remaining estate (£650,000 this year). This has removed some of the benefit of discretionary will trusts, under which couples used to transfer assets up to the value of the nil-rate band into trust in order to use up both allowances on the death of the second person.

However, they can still be useful. Nursing home or residential home fees, that might be payable by a surviving spouse if they went into care, could be avoided by not allowing all the assets to pass to them when the first spouse to die does so.

Assets held in a discretionary will trust are ring-fenced from the local authority means test, which means they are not taken into account when assessing whether somebody receiving long-term care must pay some or all of its costs.

Use trusts

Discretionary trusts enable you to retain control over assets you give. The assets you place within them become free of IHT after seven years, but you retain the right to take those assets back if you need them in the future.

However, many of the benefits of trusts have been eroded since the 2006 Budget, in which the Government announced new taxes on such trusts.

Loan trusts enable you to "lend" money to a trust and receive tax-free repayments of, usually, five per cent per year, although you do not have to take repayments. Any capital growth is also deemed to be outside your estate for IHT purposes.

Discounted gift trusts allow you to retain income from a portion of your capital, while gifting the other portion. The benefit is that the portion you are taking income from is immediately free from IHT, while the rest becomes free of IHT after seven years.