It used to be the case that only the fabulously wealthy had anything to fear from the tax man in passing on their estates to their heirs.

But today, more and more people are being caught in the inheritance tax net, thanks to the last decade’s boom in property prices.

A new study shows that the ratio of average house prices to the inheritance tax threshold is at its highest-ever level in most parts of the UK.

According to PricewaterhouseCoopers, the ratio has risen from 32 per cent in 1997 to 66 per cent in the second quarter of 2005.

In London, the average house price is now actually above the tax threshold, having risen from 49 per cent to 101 per cent in the same period, having peaked in 2004 at 103 per cent.

In his 2005 Budget, the chancellor, Gordon Brown, undertook to raise the inheritance tax threshold each year up to 2007 by more than the retail price index – a key measure of overall inflation.

However, PwC head of macroeconomics John Hawksworth warned that the government must do more: “The Chancellor’s decision in Budget 2005 to over-index the IHT threshold in 2005, 2006 and 2007 was helpful and welcome, but this policy will need to be continued in the longer term to the reduce the risk of a renewed upward creep in the inheritance tax burden.”

In April 2005, the threshold for inheritance tax was increased to £275,000.

When a person dies, the value of their “estate” – that is, everything owned in their name, including property and possessions, minus anything that they still owe – is assessed, and anything above the threshold is liable for taxation at 40 per cent.

Moreover, it is not a simple matter to avoid this liability: gifts made by the deceased in seven years prior to their death are taxable. Transfers of property ownership are caught under this provision.

Some types of gift, however, are exempt: for example, wedding gifts of up to £5,000 to one’s children.

For many older people, the main component of their estates is their home, and with property prices having risen so fast and so high, fairly modest dwellings can be hit with very large liabilities. While transfers of estates from spouse to survivor are not taxed, when the surviving spouse dies, inheritance tax is payable on the balance of the estate above the threshold.

Tax on house transfers does not need to be paid immediately, and while it can be paid in instalments over ten years, the high price of houses today makes it very difficult for some families to keep hold of their family homes.

When an inherited property is sold, the balance must be paid in full.

There are, nevertheless, ways of legitimately minimising liabilities, through careful and timely tax planning.

Simon Rees, senior tax manager at PwC told in2perspective.com: “Married (or from December, registered civil partnership) couples worried about their IHT liability should consider holding the family home as tenants in common, rather than joint tenants, so that part of the property can be passed independently. Remember too that there's plenty of simple IHT planning to be done with general exemptions - the key thing is to start planning early.”