Take these steps to manage inheritance tax

Inheritance tax (IHT) is a problem for many estates – but good financial advice and planning can cut the amount that goes to the taxman.

Here are the first options advisers and their clients should consider when planning to cut IHT bills:

Deed of variation

If someone has inherited assets within the last two years, a deed of variation can be used to remove them from their estate with immediate effect.

Nil rate band planning using an up to date will

A discretionary trust can be used to prevent the value of one partner's estate falling into the estate of the surviving spouse/civil partner. Such planning could provide a potential IHT saving of £120,000 (£300,000 @ 40%) based on the 2007/2008 nil rate band.

Maximising exemptions and pension contributions

It's possible to reduce the value of an estate for IHT purposes by:

Using the annual IHT exemption. It is possible to give away £3,000 a year without incurring a liability to IHT. The exemption may be carried forward for one year, but will be lost if not used.

Making gifts on marriage or civil partnership. Exempt gifts can be made to someone entering into marriage or a civil partnership. The amount of exemption depends on how the person making the gift is related to the bride, groom or civil partner.

Normal expenditure out of income. Exempt gifts can be made as long as they are made from surplus income and do not detract from the standard of living of the person making the gift.

Making or increasing pension contributions. A highly tax-efficient way of reducing the value of an estate is for an individual to make contributions to their pension, providing them with an income in their retirement years.

Nick Williams, Chartered Tax Adviser at Clerical Medical, said: "Inheritance tax is a growing problem for many families. Research shows that there are 2.3 million occupied properties in the UK worth more than the 2007/08 IHT threshold of £300,000 – about 12% of all owner occupied properties.

"Nearly a third of detached properties are now valued above the 2007/08 IHT threshold of £300,000. That compares with just 16% five years ago. Inheritance tax receipts for the last financial year are estimated at £3.6 billion, and are projected to rise to £4 billion this year.

"For example, an estate that consists of a house worth £350,000 could face an inheritance tax bill of £20,000 - but this bill could be cut dramatically with simple planning.

"Good financial advice and planning can help customers reduce their inheritance liabilities by using a simple estate planning strategy. It's relatively simple for people to take advantage of a range of tax exemptions and products to make sure that the maximum amount of wealth is passed to the next generation."