With house prices much higher than they were a decade ago, more and more people are finding themselves in the position of having a potential liability for Inheritance Tax.

But in many cases, tax can be avoided completely. From April, the amount that can pass on tax free is increasing to £231,000, but as this includes the value of your house, possessions and liquid assets, it no longer only affects the "wealthy."

One of the main problems is that while each person has this allowance, it is rarely used in full. The majority of married couples leave everything to their spouse on their death and vice versa, and there is no liability on transfers between spouses. But in effect only the surviving spouse ever uses their full "tax free" allowance.

If the estate is in excess of £231,000, one way of reducing or avoiding the tax would be to change the ownership of the marital home to "tenants in common", where each person would own half of the property, so that half the notional value of the property passes on to the children on the first death, while the surviving spouse can continue to live in the property.

You can also consider using trusts as a way of reducing the estate. There are various schemes where access to an "income" for up to 20 years can be achieved while getting more and more money out of the estate. Such an example would be a "gift and loan" trust. This is where a trust is set up with an outright gift of, say, £3,000 to which the surviving spouse then loans some of their money, which is then invested.

Any growth on the investment will be outside the estate and must pass to the beneficiaries. The donor can then take back five per cent of the capital over 20 years to provide the "income" because it was only a loan to the trust. A free factsheet on Trusts and their uses is available on 01484 860123.

Alan Mills is an independent financial adviser with A. J. Mills Independent Financial Advisers, a member of DBS Financial Management PLC, which is regulated by the Personal Investment Authority. Not all contracts of PHI are regulated by the PIA. Answers given are for general guidance only and specific advice should be taken before acting on any of the suggestions made. All information is based on our understanding of current tax practices which are subject to change. The value of shares and investments can go down as well as up.

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