The simplest way to avoid inheritance tax (IHT) is to make gifts while you are still alive.

Every tax year you can give away £3,000 of assets and they will not count towards your estate for IHT. If you do not use up the full exemption in one year you can carry it forward, but for one year only. Gifts of up to £250 to an unlimited number of different individuals are also tax-exempt, but you cannot use both exemptions to give to the same person.

You can also give £5,000 to your children as a wedding gift. Grandparents can hand over £2,500, and anyone else can give £1,000.

Gifts between husbands and wives are always IHT-free, as are donations to charities and political parties.

If a gift is regular, made out of income and does not affect your standard of living, any amount of money can be given away and ignored for IHT. However, you should take advice from a tax expert before you make regular gifts to ensure they will be acceptable to the HM Revenue & Customs.

You can make other tax-free gifts, called potentially exempt transfers, as long as you survive for another seven years. If you die within the seven years and the total value of the gifts is more than the £300,000 threshold, you can apply taper relief to any tax you owe.

The tax on the gift reduces on a sliding scale if it was made between three and seven years previously.

If you cannot apply taper relief you add the gifts to your other assets and pay 40 per cent tax on the sum above the £300,000 threshold.

For example, if a gift is worth £200,000 after applying any exemptions, and the rest of your estate is valued at £500,000, you pay 40 per cent tax on £400,000.

If you are worried that you won’t survive for seven years, you can set up a decreasing-term insurance policy that will cover any IHT bill.

The government has cracked down on more complex tax-avoidance schemes. Many trusts now attract inheritance tax, so it is a good idea to seek professional help if you want to set up a trust.

Explore Money

• Property & Mortgages

• Savings

• Borrowing

• Investment

• Funds

• Insurance

• Consumer Affairs

• Tax

• Pensions

• Broadband