Inheritance tax (IHT) was originally introduced in the UK in 1986 it is the successor to Capital Transfer Tax (CTT), which was an integrated lifetime transfer and estates tax.

Inheritance Tax is the tax that is paid on your 'estate'. Broadly speaking this is everything you own at the time of your death, less what you owe. It's also sometimes payable on assets you may have given away during your lifetime. Assets include things like property, possessions, money and investments.

Not everyone pays Inheritance Tax on death, and with careful planning no one needs to pay it at all.

IHT only applies if the taxable value of your estate when you die is above £285,000, the nil rate band, (2006-2007 tax year) and is only payable on the excess above this threshold. In 2007 -2008 he nil rated band raises to £300,000

There are also a number of exemptions which allow you to pass on amounts (during your lifetime or in your will) without any Inheritance Tax being due, for example:

• if your estate passes to your husband, wife or civil partner and you are both domiciled in the UK there is no Inheritance Tax to pay even if it's above the £285,000 threshold • most gifts made more than seven years before your death are exempt (but see the next section on trusts and companies) • certain other gifts, such as wedding gifts and gifts in anticipation of a civil partnership up to £5,000 (depending on the relationship between the giver and the recipient), gifts to charity, and £3,000 given away each year are also exempt

Many people just do not realise that when they die their families might have a large inheritance tax burden. The tax debt will have to be paid within six months of the person's death and will have to be settled before assets can be disposed of. For many this leaves family members having to take out bridging loans in order to pay the inheritance tax bill.

The number of estates paying IHT rose by more than 70% in the five years to 2003/04. Estates valued at less than £500,000 accounted for 71% of those.

The tax take from IHT has nearly doubled since Labour came to power, rising from £1.7bn in 1996/97 to £3.3bn in the 2005/06 tax year.

I mentioned earlier that no actually needs to pay IHT, I run a will writing and estate planning business and consult with a large number of people a year, very few, when given the option of paying large sums of money to the government or being able to pass this money on to their children and loved ones have ever asked me to ensure the taxman gets their money.

So let's look at some steps you can take to reduce or eliminate your IHT bill.

The first step is having a plan, do not wait start today.

A good starting point is to get an experienced will writer to create a will for you that makes use of your nil rate band allowance. If your are a married couple or living in a civil partnership you can freely pass assets to each other with incurring Capital Gains Tax or an Inheritance Tax liability. A good will writer will help you understand how you can back best use of both partners nil rate band. If through your will you make maximum use of your nil rate band allowance you would have already reduced you inheritance tax bill by £114,000 in 2006/7 tax year and £120,000 in 2007/8.

Next remember you cannot be taxed on money that was never yours. So ensure that as much as possible is outside your estate. Write any new life insurance plans under trust, Many existing life policies can be transferred into a trust. If your employer pays a death benefit, complete a nomination form to make sure that any money goes directly to the person you choose and not into your estate.

It is also worth thinking about legacies you may receive from other peoples wills. Someone who benefits from a legacy can divert that gift to another person. You can apply for a deed of variation within two years of the death of the giver again consult a will writing specialist company like my own for help in this area.

For many families, their homes are their biggest asset and their biggest inheritance tax headache.

The Government clamped down on 'gift with reservation' schemes recently. These allowed people to give away homes, but still live in them. Now, income tax can be charged for living rent free in a home you once owned.

But there are still ways to reduce IHT. Most couples who own a home together are joint tenants. This means that if one person dies, the other automatically becomes the outright owner of the home. The alternative is to register as tenants in common, each owning half the property absolutely. This means that on death, your share may be left to someone else to keep down the size of your estate.

Some investments are given favourable treatment for inheritance tax purposes, including shares in unquoted businesses, woodlands, farms and farmland. Shares on the AIM junior stock market also qualify for relief; these might be areas worth investing in but always seek the advice of an independent financial adviser as some of these areas have a higher risk associated with them

Earlier I mentioned an Inheritance tax trust as part of your will, several other trusts can help in estate planning. Depending on the type you choose, it can still be possible to enjoy an income from money paid into trust, even though you are no longer the legal owner of that cash. Trusts used effectively will give you more control over what happens to money.

I am a great advocate of using insurance to help pay the IHT tax bill. Estimate how big an IHT bill your heirs face then arrange insurance to cover part or all of it. Whole-of-life insurance written under trust can provide a lump sum on death that is outside an estate. On death, the proceeds of the policy can be used to settle the tax bill. The premiums are treated for tax purposes as a gift from regular income, so subject to the relevant limits you could pay the premiums yourself.

Another option that should seriously be considered is just spending your money. If you are worried that your wealth is going to leave your family a hugh IHT bill, then throw off the shackles and enjoy yourself. 'Spending your money is an entirely valid strategy to reduce what the Chancellor takes.

One trap that many clients fall into is they believe they can just give away their money, house and other assets. Giving away money will reduce your estate, but will not cut the tax liability immediately.

You have to survive for seven years for most gifts to escape the IHT net. The Revenue allows gifts of up to £3,000 each tax year. Unlimited gifts up to £250 a person per tax year are exempt, as are payments up to £5,000 for wedding gifts. The most powerful concession is that gifts made from normal income can be exempt from IHT.

For gifts between individuals no tax is payable at time of gift. When death occurs with seven years of making the gift, the tax bill tapers off.

Years between gift and tax Reduction in tax

0-3 0% 3-4 20% 4-5 40% 5-6 60% 6-7 80%

I should emphasise that I have only highlighted a few of the main strategies for opting out of inheritance tax. Each case needs to be considered on an individual basis and you should always take professional advice as this area is constantly changing.

Opt in or opt out the choice is yours. If like me you would prefer to decide where your wealth goes after you have gone please feel free to have a look at our web site and contact us if you need more help.