QUESTION: What can I do to reduce the value of my estate and avoid Inheritance Tax? Are there any tax free gifts I can make now to reduce the future burden of tax? ANSWER: Inheritance tax (IHT) is levied on a person's estate when they die, and on certain gifts made during an individual's lifetime. Most gifts made more than seven years before death will escape tax. Therefore, if you plan in advance, gifts can be made tax-free and result in a substantial tax saving. In 2013/14 the first £325,000 of the estate is chargeable at 0 per cent and this is known as the nil rate band with the balance of the estate taxed at 40 per cent. Gifts made within seven years of death may also become chargeable to tax on death. Much estate planning involves making lifetime gifts to utilise exemptions and reliefs. However,t careful consideration needs to be given to other factors. For example a gift that saves IHT may unnecessarily create other tax charges such as capital gains tax. Furthermore the prospect of saving IHT should not be allowed to jeopardise the financial security of those involved. There are many gifts which are exempt from inheritance tax. Some £3,000 a year may be given by an individual without an IHT charge. This annual exemption may be carried forward to the next year but not thereafter, so if you didn't use your relief last year you can make a tax free gift of £6,000 this year. Gifts between a husband and wife are generally exempt so this exemption can be used to ensure that both spouses each make full use of their lifetime exemptions and reliefs. Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt and gifts which are made out of income which are typical and habitual and do not result in a fall in the standard of living of the donor are also exempt. Payments under deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption. Gifts in consideration of marriage are exempt up to £5,000 if made by a parent, with lower limits for other donors. Gifts to registered charities are also exempt provided that the gift becomes the property of the charity or is held for charitable purposes. Trusts can provide an effective means of transferring assets out of an estate to reduce IHT exposure whilst still allowing flexibility in the ultimate destination and permitting the donor to retain some control over the assets. Provided that the donor does not obtain any benefit or enjoyment from the trust, the property can be removed from the estate and avoid IHT. Life assurance arrangements can also be used as a means of removing value from an estate and as a method of funding IHT liabilities. A policy can also be arranged to cover the IHT due on death. It is particularly useful in providing funds to meet an IHT liability where the assets are not easily realised. As the main IHT liability is likely to arise on death, a sensible and up to date will is very important. * Feargal McCormack (f.mccormack@fpmca.com) is managing partner of FPM Chartered Accountants (www. fpmca.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.