Ian Washbourne, Partner, at Cardiff & Bridgend accountancy firm, Graham Paul, looks into why booming house prices and increased prosperity are the main reasons ordinary people, not the mega rich, are falling into the Inheritance Tax Trap.

“The rich often manage to avoid it completely, whereas those with modest wealth get hit hardest” says Washbourne, "and this rings true when you consider that homes valued at £250,000 or over are commonplace nowadays, so it’s easy to breach the £263,000 inheritance tax threshold. Inheritance tax doesn’t work like other taxes – it is a 40% tax charge for everyone".

Incongruously, it is called a voluntary tax because the rich often manage to avoid it completely, whereas those with modest wealth get hit hardest. Why? Because the rich avoid it with careful financial planning, while Mr and Mrs Average don’t think they will reach the threshold. To reduce or avoid the tax completely you need to take advantage of allowances and exemptions. The first £263,000 is exempt – meaning husband and wife can jointly leave £526,000 free of tax. Many people make the mistake of leaving everything to their partners, but on the death of the surviving spouse only £263,000 can then be passed on tax free to the rest of the family.

A couple whose estate is worth £500,000, leaving the whole amount to a spouse – who then passes it on to children - would leave the family with a hefty £95,000 tax bill. So it makes sense to pass part of the family fortune on to your loved ones on the first death.

So as not to leave your spouse short of income, placing investments in a Discretionary Trust helps as your spouse, children and grandchildren can all be beneficiaries and the trustees can pay income and/or capital to your spouse. On larger estates, anything passed on seven years before you die is tax-free. If you die more than three years, but less than seven years, later there is a reduced rate payable. Further protection against dying prematurely would be a seven-year, reducing-term insurance policy sufficient to cover the potential tax liability, which is kept separate from your estate and written in trust. Also, you can gift away up to £3,000 a year and it can be carried forward for a year if you don’t use it that year.

A couple can pass on £60,000 tax free in 10 years. You can also make many small gifts up to £250 a year, give your son/ daughter up to £5,000 as a wedding gift and up to £2,500 to each grandchild on his or her wedding. These gifts must be made before the big day, and become taxable if the bride/ groom calls the whole thing off.

Gifts to charities, political parties and to the nation, such as to the National Trust or British Museum, are also exempt. If you are in business, reduced rates apply to business and farming assets too. To make best use of the relief’s, you need seek professional advice from an independent financial adviser who specialises in tax planning and take time to draw up a will. A solicitor can help you draw up a will.

In the UK we are paying £1.24bn a year more in inheritance tax than we need to, according to IFA Promotion, the organisation, which promotes the benefits of independent financial advice.

The past is not necessarily a guide to future performance. Levels and bases of, and reliefs from, taxation are subject to change. Tax reliefs referred to are those currently applying and their value depends on the circumstances of the individual investor or fund involved.