Inheritance tax (IHT) hit a record high of ￡5.6bn in 2020/21, and this is just the start of it. In the most recent tax year it’s expected to reach ￡7bn, and with inheritance tax allowances frozen until 2028, there’s every chance it will just keep on going up.

So although none of us like to dwell on the fact that one day we’ll turn our toes up to the daisies — we need to consider whether we’ll end up leaving our loved ones a tax headache.

The good news is that it’s still the exception to the norm, because fewer than 4% of estates end up paying the tax. However, with an average inheritance tax bill of ￡214,000, it’s worth doing the maths to see if you’re likely to fall into this unlucky group.

We all have an allowance of ￡325,000 which we can leave without paying inheritance tax. If you own your own home, and are leaving it to children or grandchildren, you get another ￡175,000 to set against the value of your home. If you’re married or in a civil partnership, you can also leave whatever you like to your partner without being subject to inheritance tax on that. Plus, if you die and leave everything to your spouse or civil partner, you will also be leaving them your inheritance tax allowances. It means that on the second death they might have an estate worth up to ￡1m before there’s any tax to pay.

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If this will comfortably cover your estate, you can relax. However, given how house prices have risen in recent years, there’s a chance you could be leaving more than this, so it’s worth considering some inheritance tax planning in the years to come.

How to avoid an inheritance tax bill

One of the most effective approaches is to give your family and friends gifts during your lifetime rather than leaving it all in your will.

Not only does it have tax benefits, it also means you get to see them enjoy the money while you’re still around.

You get a gift allowance of ￡3,000 each year that falls out of your estate immediately for inheritance tax purposes. You can also give small gifts of up to ￡250, specific gifts for family weddings and unlimited regular gifts from income.

Outside the gifting allowances, you can make gifts of any size (known as potentially exempt transfers) and as long as you live for at least seven years after handing it over, it falls outside of your estate for inheritance tax purposes.

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If you die before the seven years are up, and your estate is subject to IHT, you will have to pay tax on some of this. This can be an incredibly useful way to cut your tax bill, but you need to be confident you’re not giving away money you may need later.