Inheritance tax is the tax levied against your estate upon your death. 

If the value of your assets at death, (plus the total value of any gifts you made during the last seven years of your life), minus any debt liabilities exceeds £250,000 you will have to pay inheritance tax on the remainder at 40%.

Generally it is anyone whose estate exceeds the value of £250,000. However, it does not have to be paid on assets that pass to your husband or wife.

To calculate whether you are liable to pay inheritance tax:

Work out the value of your estate (Total assets minus total debts)

+

Total amount of any gifts made during the last seven years.

=

less than £250,000, then no Inheritance tax is due

more than £250,000, then Inheritance tax is charged at 40% on the excess.

It is possible to reduce the amount of inheritance tax you pay by a variety of methods such as the giving of gifts, dividing assets and setting up trusts.  You can even avoid IHT if you own or buy a wood as they are exempt. Here are a few options but we would recommend you seek further advice from a solicitor.

Married couples
It is not advisable to have a Will which mirrors your partners i.e. where everything goes to the other spouse.  This does not make good use of the other spouse's tax allowance.  

It is better to sit down and identify the assets that one spouse will not need after the death of the other and make provisions for certain assets to go immediately to the children or another person of your choice.

Unmarried couples
Each partner should keep their assets within the inheritance tax boundary by splitting them up accordingly because unlike married couples, unmarried couples cannot pass on assets to partners without paying inheritance tax.

For example if Mr and Mrs Jones have an estate worth £500,000 when Mr Jones dies there would be no tax to pay as IHT is exempt on assets passed to a spouse.

However, when Mrs Jones dies  £250,000 of the estate would remain tax free but the remaining balance would be subject to 40% tax.

If Mr Jones were to leave assets worth £100,000 to a trust then when Mrs Jones dies, only £150,000 would be subject to tax. 

Mrs Jones is still able to access the money in the trust whilst she is alive as Mr Jones can instruct trustees to pay his wife an income from the trust.

Other gifts can also be made tax free provided you survive for 7 full years from when the gift is made. If you die before seven years have passed, tax will be payable but in a tiered way (see below).

For example, if Mr Jones gave a friend £10,000 but died within 3 years of doing so, Mr Jones's friend would have to pay IHT on 100% of the gift given so £4,000 would have to be paid to the Inland Revenue.  If however, Mr Jones died within 4 years, 80% of the gift would be subject to tax so £3,200 would have to be paid by Mr Jones's friend to the Inland Revenue, and so on.

If Mr Jones died in his seventh year after giving his friend £10,000, 20% of the £10,000 would be subject to tax, whereas if Mr Jones died at the beginning of his 8th year, the gift would be totally exempt.

Records of all such transactions should be kept so that IHT can be calculated accordingly at the time of death.

Years survived before death after giving the gift	% of gift to be taxed
0-3  years	100
3-4  years	80
4-5 years	60
5-6 years	40
6-7 years	20