If you’re lucky enough to have an estate worth over £325,000 (as of April 2009) when you pass away then your family or whoever you leave your estate to will have to pay inheritance tax on any amount over this threshold. The current tax rate for any excess stands at 40% and so you’ll want to do whatever you can to keep your inheritance tax down. Below are a few tips to help you achieve this.

1. Give your money to loved ones over a number of years
You can make a tax-free gift of £3000 each year to a person of your choice, or several large gifts up to the amount of £3000. This can be backdated by one year so if you fail to make a gift one year you can still give the money away the following year, up to £6000 in this case. In addition, you can make as many small gifts of £250 or less as you like throughout your lifetime, you can give your children a tax-free wedding gift of up to £5000, your grandchildren a wedding gift of up to £2500 and anyone else you know a wedding gift of up to £1000.

2. Use the Spouse of Civil partner exemption
Anything you leave to a spouse or civil partner, providing they have their permanent home in the UK, is often exempt from inheritance tax – even if the value of the estate exceeds the £325,000 threshold. Alternatively you can leave £325,000 in trust and make good use of the nil-rate band. Then when your spouse or civil partner passes away your children or whoever inherits can use a double nil-rate band worth £650,000. For this you will need an up-to-date will.

3. Use the seven-year exemption clause
As the law stands, any asset or gift that you give to another person generally becomes tax exempt after seven years. This is known as a PET, or Potentially Exempt Transfer. A PET can be of any value and the inheritance tax due on it decreases each year. By the seventh year the tax payable is virtually, if not definitely, 0% and the PET is then tax exempt. It’s important to cover PETs with term assurance though, just in case you pass away before the seven years are up and the recipient becomes liable for inheritance tax.

4. Make charity contributions
Any gifts that you make to UK registered charities either during your lifetime or in your will are automatically exempt from inheritance tax. Although this doesn’t benefit your children or anyone else who is in line to inherit your estate, it will benefit a lot of other people in the long run and it can reduce your inheritance tax as well.

5. Make regular gifts from your salary
You can also reduce your inheritance tax by giving away gifts on a regular basis from your income. You have to show that the gifts come from your after-tax income and that they are made regularly i.e. not a one off gift. These regular gifts can be used to pay for a life assurance policy which will eventually pay your inheritance tax bill –sneaky but clever and 100% legal.