With more than one in ten houses in Britain now valued at more than the inheritance tax (IHT) threshold – and one in five in the south east - the question everyone is asking is: can I avoid death duties on my property?

While it’s true that it has become more difficult to escape the tax on the family home after the government stamped out several loopholes, there are still ways to pass on your property to your children and wipe out an IHT bill. Here we explain how.

Is there a simple way to avoid IHT on my property?

Yes, but it works only if the value of your share of the house, and that of your spouse, is equal to the IHT allowance – £600,000 combined at present. Any other assets above £600,000 would be subject to IHT.

If house prices continue to rise faster than the allowance over the long term, more people will find this strategy no longer works well – but for the moment it is one of the most effective ways to cut death duties.

Take a husband and wife with a £600,000 home. When the husband dies, his wife will have no IHT to pay as transfers between spouses are tax-free. When the wife dies, though, her estate will be taxed at 40% on assets above £300,000 – a bill of £120,000.

However, a nil-rate band discretionary will trust ensures that both the husband and wife’s allowances are used so the entire £600,000 is free from tax.

This arrangement can be set up even after death. A deed of variation allows the beneficiaries of a will to agree among themselves that it should be rewritten within two years of death. This ensures assets are passed on in the most tax-efficient way.

To ensure the scheme works you need to change ownership of the property from joint tenants to tenants in common. This can be done at the same time as making a deed of variation.

Our estate is worth more than £600,000. Can I give all or part of my home away to avoid an IHT problem?

It’s the question everyone asks, and unfortunately there’s not a simple answer.

Giving away assets during your lifetime is a simple and legitimate way to take the sting out of death duties. If your estate was made up of a £600,000 house plus £300,000 in other assets, you could potentially wipe out an IHT problem by handing the home to your children.

There are a number of hoops you have to jump through. The gift would be regarded as a “potentially exempt transfer” and would become completely free of death duties only if you lived for seven years. The tax reduces on a sliding scale if the transfer was made between three and seven years earlier.

To obtain the IHT exemption you have to pay a market rent to your children while you continue to live there. If you live there rent-free, this is considered a “gift with reservation of benefit” and the home remains in your estate, meaning no IHT saving.

The Revenue will check you paid a fair rent after your death, so accountants suggest getting an estate agent to confirm the going rate in your area in writing.

Your children also have to pay income tax on the rent they receive. They are also likely to be subject to capital-gains tax (CGT) if they sell the home after your death, as it is not their primary residence. All these factors can wipe out an IHT saving, depending on how long you live and how much income tax your children have to pay.

Mike Warburton at Grant Thornton, an accountant, said: “If you are prepared to pay rent to your children, and they are happy to pay income tax on the rent it can be worthwhile.

“However, it depends on personal circumstances such as the value of the property being transferred, the tax status of the children and how soon the parents die.”

So when might gifting work?

Take a couple whose IHT-free allowances are used up by other assets and want to pass on their £500,000 home to their daughter who is a higher-rate taxpayer.

The parents hand over the house to her but continue to live there. Based on current rental yields, a realistic rent would be about 5% of the value of the gift: £25,000 a year.

Many children in effect pay their parents back by buying them holidays or paying for home improvements. But you cannot just hand the money back to your parents. If the Revenue discovers that there was an agreement to reimburse them you will fall foul of the reservation of benefit rules and the property will be subject to tax.

The couple die 10 years after making the gift, meaning the house is exempt from death duties. During the 10 years the house has gone up in value to £700,000. If the rest of their estate uses up their nil-rate band allowances, the daughter would save 40% of £700,000, or £280,000 in IHT.

There are other taxes to pay though. Is she still better off?

The daughter has to pay 40% income tax on the £25,000 a year rent: £10,000 a year, or £100,000 over the whole 10-year period.

If the daughter decides to sell there will be a CGT bill on the £200,000 increase in value since her parents gifted her the house. After applying taper relief she pays 24% tax on the increase or £48,000. This assumes she has used up her annual CGT allowance elsewhere. That’s a combined tax bill of £148,000 to escape £280,000 in IHT.

Giving away your home can be particularly tax efficient if your children are not earning, perhaps because they have had time off to bring up children of their own, because they may be liable to only lower or basic-rate income tax.

Is there anything I can do to reduce the taxes on income and capital gains?

If you put the property into a trust for your children it can become exempt from CGT.

Discretionary trusts are most commonly used, but there are pitfalls: you must pay an immediate IHT charge of 20% of the value of the gift above the nil-rate band, or £40,000 on a £500,000 property, plus a 6% IHT charge every 10 years on the value of the trust over the threshold.

There can also be an exit charge of up to 6% on proceeds above the nil-rate band.

Warburton said: “It can be cheaper paying the IHT charge, but you can also end up paying more. It depends on how long you live and how much your house rises in value.”

You could also give a share of the house to your children and let them move in with you. As long as you share the running costs and own the property equally there is no IHT to pay after seven years and no CGT. Neither is there any need for the parents to pay rent.

If you have a big family home, but are only using part of it now the children have flown the nest, you could also close off part of the property to cut the amount of rent that you have to pay.

Are there any schemes that let me pass on my home free from IHT?

Yes, equity-release schemes such as Property Wealth Manager, marketed by Close Brothers, and run by Ioma Group, an Isle of Man insurance company.

You sell your whole house to Ioma in exchange for a lump sum and a guarantee you can live in it for the rest of your life. It invests the lump sum in an investment plan worth the same as your home, less charges.

Your home goes into a fund underlying the investment plan. You pass the investment to your children either as a straightforward gift or through a trust.

The money held in the plan will be entirely free of IHT if you survive for another seven years after the gift has been made.

Your children will be given first refusal on the option of buying back the property when you die. They can use the money they inherited in the plan.

In a roundabout way, the scheme can enable you to pass on your family home to your children without death duties.

However, even if you live for seven years, your family won’t escape tax completely. Your heirs will pay income tax on any growth in house prices since you took out the plan.

WHERE THERE’S A WILL THERE’S A WAY

Joan and Robert Spencer saved their sons David (pictured) and Michael tens of thousands of pounds in inheritance tax (IHT) through simple planning. The couple, from Prestwich, Manchester, sought help from a financial adviser at Skipton Financial Services.

They talked about giving away some of their assets to reduce their estate. But this wasn’t a realistic solution because they want to hang on to their investments and to continue to live in their home.

Instead, it was recommended that they should set up a discretionary will trust. This allows them both to make use of their individual nil-rate bands – the threshold below which IHT is not paid. This year the nil-rate band is £300,000 so this one piece of planning takes £600,000 of their estate out of the IHT net.

Joan said: ‘It was a shock to learn how much tax our children could pay.

‘Fortunately, setting up the will trust was easy to arrange.’