Inheritance Tax (IHT) was originally intended to target the super-rich. But since the death levy was introduced in the early 20th century, its thresholds have fallen, in real terms, and now 1.4m homeowners in the UK are liable. House prices have continued to rise at pace, while the threshold above which IHT bites – the nil-rate band – has grown only slightly. Now anybody with a net worth of more than £263,000 can fall victim to IHT, which is a flat rate of 40% of everything that exceeds the threshold.

Happily, it is one of the most avoidable taxes. It has loopholes that are so simple to exploit that all but the most incompetent financial advisor should be able to ensure you don’t pay a penny.

Where there’s a will…

The key is in your will. To ensure that it is legally watertight, always seek professional help when writing or updating a will. This way you will be sure to have all the necessary weaponry to combat IHT.

By leaving your estate to your nearest and dearest in the right amounts, you will protect them from having to pay a penny after you die.

It is fine, in the short term, to bequeath your worldly goods to your spouse. Spouses do not have to pay taxes on possessions handed over to them by their partners. But once the second partner dies, anything left of the estate is subject to IHT – and that’s no good if you have children, who will have to pay the levy.

The trick here is to make use of the nil-rate band while you and your spouse are still alive. First, you need to divide ownership of your assets as evenly as possible between the two of you. Then make wills each leaving up to £255,000 to your children. (You don’t have to leave a specific sum. You can simply say you wish to leave an amount equivalent to the nil-rate band operating in the year of your death). The remainder of the estate should be bequeathed to each other.

So far, IHT-free. When one partner dies, the kids’ legacy is within the threshold and the spouse is ineligible for tax. And when the second parent dies, the children once again inherit without penalty.

A Discretionary Method

A nil-rate band Discretionary Will Trust is another fiendishly simple method for avoiding IHT. This arrangement allows your beneficiaries (spouse or children) to borrow back assets in the trust in the form of an interest-free loan, usually up to the amount equivalent to the nil-rate threshold. When they die, the loan is repaid from their estate. Single people and unmarried couples are entitled to make use of such discretionary trusts, despite the long-held and mistaken belief that they are only for married couples. Say, then, that a couple with assets of £510,000 divided equally between them insert Nil-Rate Band Trusts into their wills. When one dies, £255,000 is left to the trust. When the other dies, their estate is reduced in value by the £255,000 debt to the trust, meaning less or no IHT to pay.

Other simple ways

There are other ways to avoid paying IHT that aren’t linked to your will. The simplest is Potentially Exempt Transfer (PET), and it means giving away your assets. Whatever you hand over free of charge is exempt from death tax as long as you survive the donation for more than seven years. If you don’t, then the recipient will be taxed – but on a sliding scale. Should you pass away within three years of making a PET, it will be subject to the full 40% levy. But the tax reduces as the years increase to the maximum of seven.

Of course, making a PET is senseless if you are in ill health and may not live for seven more years. And if you are young it is most unwise to give away assets you will need for a decent lifestyle. Therefore, some shrewd balancing of priorities is required.