Inheritance tax is one of the most disliked forms of tax because it is also one of the biggest. This type of tax is paid according to the value of your estate but it only becomes payable when you die. This means that you personally aren’t liable for inheritance tax but the people you leave your estate to will be.

At present there is an Inheritance tax threshold of £312,000 (for the year 2008-9) and so any estates worth less than this are exempt from taxation. Saying that it is not just the property and valuables you own that constitute your estate – it also includes any assets held in trust funds, any investments you have and any large gifts you may have made within the previous seven years. Should the worth of your entire estate exceed the threshold of £312,000 then your benefactors will be required to pay tax to the tune of 40% on anything over the threshold amount.

So who pays the Inheritance tax? That depends on who receives your estate in your will. Normally it will be the personal representative or the executor of the estate and it is paid from the worth of the estate. If additional assets are held in Trust then the appointed Trustees are liable for that portion of the Inheritance tax. Some gifts made to individuals throughout your lifetime might also be taxable and it is important to inform the recipients that they may be presented with a bill.

It is often possible to reduce Inheritance tax down to nothing using a well executed will and the use of trusts. Handing over the bulk of your estate during your lifetime can mean that at the time of your death you own less than the threshold amount and so there is no inheritance tax to pay. Using this method though means relinquishing control of most of your money and assets and a lot of people don’t like the idea of doing this. A good financial planner will be able to advise you on the best way to reduce and even remove the threat of inheritance tax and there are a variety of ways to make sure the Inland Revenue gets as little of your money as possible when you die.

Inheritance tax becomes payable immediately and must be paid within six months of your death to avoid interest being charged. If the value of your estate is tied up, for example in a house or other property, then it is possible to pay the outstanding amount in monthly instalments over a number of years.

The best place to go for further information on the ins and outs of Inheritance tax is the HMRC website.