FOLLOWING the recent press reports on gifts made to David Cameron from his mother, the issue of inheritance tax (IHT) once again finds itself under the political spotlight.

Coupled with the announcement of a record take of IHT (£4.6 Billion) in the last tax year, I thought it might be worth highlighting a few key facts on IHT.

What is the current IHT allowance?

The current inheritance tax-free allowance for individuals is £325,000, so if your estate is worth more than this when you die; the remainder will be taxed at 40 per cent.

However, any assets transferred between married couples or civil partners are free of tax. In addition to this, any unused IHT allowance on the death of one spouse can be automatically inherited by the surviving partner. Therefore, in practice, a surviving spouse or civil partner is often left with an IHT allowance of £650,000 to set against their estate.

When calculating what forms part of your estate for IHT purposes, HMRC includes everything you own — your house, your car, your savings, your investments and your share of any joint assets. Items of notable value, such as jewellery and any other personal possessions you own, are also factored in.

So what can you legitimately do to minimise any IHT your estate may be liable for?

The simplest and most common way of reducing your IHT liability, is to give away gifts in your lifetime and make use of the exemptions available.

For example if you use your annual exemption, you can give away up to £3,000 in total each year tax free. Many people also don’t realise that any regular gifts you make out of your after-tax income, not including your capital, are also exempt from IHT.

Don’t forget to keep good records though, as this could be subject to challenge.

You can also make small gifts up to the value of £250 to as many individuals as you like in any one tax year.

Any gifts made outside of the exemptions detailed above are classed as a potentially exempt transfer and is subject to a seven-year rule.

This means that any gift you make, irrespective of the value, will be exempt from IHT as long as you live for seven years after making the gift.

If you die within seven years and the total value of gifts you made is less than the IHT threshold, then the value of the gifts is added to your estate and any tax due is paid out of the estate. However, if you die within seven years of making a gift and the gift is valued at more than the IHT threshold, IHT will be paid on its value.

Another option is to set up a trust in your lifetime (as opposed to a will trust) and as long as the trust property is below the nil rate band (£325,000) then there will be no immediate charge to IHT. After a period of seven years, the full nil rate band is available again.

Some people use trusts to reduce the value of their estates which can reduce the requirement to pay IHT.

However, trusts are subject to specific tax regimes so all the relevant costs and implications should be carefully considered.

One last piece of good news is the new Residential Nil Rate Band (RNRB) which is being phased in from April, 2017, through to April, 2020.

For estates worth less than £2 million, an additional main residence nil rate band of £175,000 per person, will be added to the existing thresholds.

Therefore in theory, each qualifying individual could have an IHT allowance of £500,000 to set against their estate.

Estate planning can indeed be complicated, but ignoring the issue could prove to be a costly mistake for your family in the future.