‘What can I do about Inheritance Tax?’ is one of the most common questions I am asked. And rising house prices mean that many people are right to be worried. About 35,000 estates will be caught by IHT this year and that is about one in ten of those which could pay the tax – excluding married people who are exempt.

To see if you may be affected add up everything you own – including the value of your home of course. Take off any debts – including the debt you may owe due to an equity release plan on your home. If the total comes to less than £275,000 then your heirs will not have to pay Inheritance Tax at all even if you die today – and that figure will be a bit higher from April 6^th.

If it comes to more than that, then the excess is taxed at 40 per cent. So if you leave £370,000, your heirs will have to find £38,000 in tax. A bit of planning in advance can reduce the tax that is due, especially for married couples.

Beware of financial advisers who try to sell you complicated schemes to avoid the tax. They always cost you money, and if the scheme does not work then it is your heirs, not the adviser, who will end up paying the bill. Recently the Government clamped down on one scheme leaving 30,000 people, who had paid good money for advice, with a tax bill every year just to carry on living in their own home. The Government has warned that it will take action against any scheme which is set up just to avoid tax.

The easiest way to avoid Inheritance Tax is to give away your property and live at least seven more years. Once you do that, the gift falls outside Inheritance Tax. But that does not work for your biggest financial asset – your home. If you give that away and carry on living it the Inland Revenue considers that you still own the property and its value forms part of your estate even if your children are the legal owners. There is a safe and legal way for married couples to reduce the tax that is due on their main residence. But before looking at that it is worth thinking about giving money away.

Every year you can give away up to £3000 without it coming into the Inheritance Tax arithmetic at all. This exemption applies separately to husband and wife and you can bring forward last year’s exemption. So a married couple who gave nothing away last year can give £12,000 between them to their heirs with no worries about Inheritance Tax biting if they died next week. It is best to give cash not objects or shares – if you do that there can be Capital Gains Tax to pay.

You can also give away any amount of money as long as it is from your income and will not reduce your standard of living. For example, a widow may have inherited a generous pension from her late husband and have an income which exceeds her needs. She can give away the surplus each year without it counting as part of her money when Inheritance Tax is calculated.

You can also make individual gifts of up to £250 to any number of people. And when someone marries you can give up to £5000 if it is one of your children, up to £2500 if it is a grandchild or great-grandchild and up to £1000 to anyone else.

Never give away money that you need. It is your money, not theirs, you worked hard for it and you should benefit from it while you live.

Married couples
Husbands and wives do not have to pay any Inheritance Tax when their spouse dies. But that does not mean couples need not worry about Inheritance Tax until the first person has passed away. Quite the opposite. John and Rita Jones live in the family home which cost them around £8000 but is now worth a cool half million. They both make wills leaving everything to each other. John dies and the house and his other possessions, worth around £15,000, pass to Rita. No Inheritance Tax is payable. Then she dies, leaving everything to her son Andrew. He hoped to give up his rented flat and move into the family home. But the total estate is valued at £525,000 and Andrew had to find £100,000 tax. He has to sell his mother’s home to pay it.

The way round this problem is to change the way you own your home. Most couples own it as what are called ‘joint tenants’ which means they both own it all and when one dies the other becomes the owner of it all. But a couple can also own a property as what is called ‘tenants in common’ where each of them owns a defined share of the home, normally half. If the Jones’s had owned their home this way, they could have saved Andrew the Inheritance Tax. It works like this. Each leaves their own half of the home to Andrew. When John dies, Rita still owns half the house and Andrew owns the other half. Rita’s half is exempt from IHT. And Andrew’s half is below the rate at which Inheritance Tax is charged, so no tax is due on John’s death. When Rita dies, that half is also below the threshold, so no tax is due on her estate either. So Andrew can move into the family home.

To change the way you own a home, you can write to each other simply ending the joint tenancy and saying that in future the property will be owned as tenants in common in equal shares. You should also contact your local Land Registry office and ask for form RX1 ‘Application to enter a restriction’. The Land Registry in Liverpool has produced a form already filled in which shows what to write in which boxes. There is no fee to pay.

In Scotland the terms are ‘joint owners’ (tenants in common) and ‘joint owners with survivorship’ (for joint tenants). You change from one to the other by transferring the property from yourselves to yourselves – it’s called making a disposition. You need to see a lawyer.

There are problems to be aware of. After the first death, the property is half owned by your child or children. As joint owners they could force a sale of the property leaving you homeless. You cannot give it to them on condition they do not do that or the Inland Revenue will count the home as all yours. If any of them gets divorced or goes bankrupt then the courts may intervene and force a sale. Owning half the house could prevent them from getting a means-tested benefit such as job seekers allowance, pension credit, or council tax benefit.

Mike Warburton of accountants Grant Thornton says there is a simple way round these problems. Instead of each spouse leaving half the house directly to the children they leave the value of it to a discretionary trust with the children as beneficiaries. On the first death the trust accepts a debt equal to half the home from the surviving spouse. That debt is repayable on her death. It sounds complicated but Mike Warburton says

"Most solicitors will have it in their precedents book. So it is just the cost of having a will made. In any case you should review your will every few years, so the net cost is effectively zero."

The Government has said it will not stop spouses each leaving half their house to their children.

There is another big loophole that can give complete exemption to IHT when an older widow dies. The little known rule applies to women who were widowed more than 30 years ago – before 13 November 1974. That was the date when Estate Duty was replaced by the new Capital Transfer Tax – now called Inheritance Tax. There was a danger that some estates would be taxed twice – once under Estate Duty when a husband died and then again under the new rules when their widow died. So where a widow inherited property – including her home – through what was called an ‘interest in possession’ under Estate Duty, that property is exempt from Inheritance Tax when she dies. John Whiting of PricewaterhouseCoopers warns that nowadays many solicitors not be aware of the 1974 rules. "It is not something that you come across every day, and I do wonder if it has been forgotten about on some occasions in recent years." For more information see Inheritance Tax Act 1984 Schedule 6 para.2.