The subject of Inheritance Tax - the tax paid on your estate following your death - tends to inspire strong feelings in people. Not unnaturally, most would rather not pay it! But, while there is no way to avoid it altogether, there are actions you can take to reduce your estate's liability.

If you are single and a permanent resident in the UK, you are entitled to an individual allowance of £325,000 before your estate becomes liable for Inheritance Tax. If you are married or in a civil partnership, this allowance rises to a maximum of £650,000.  Any surplus of your estate thereafter is taxed at 40%.  One common-held belief is that Inheritance Tax doesn't apply to the parts of your estate that are outside the UK such as a holiday home. However, this is not the case. If you have property, shares, money and jewellery - whether held in the UK or another country - all are subject to 40% tax once your allowance has been spent.

There are a number of ways to minimise your estate's tax liability. A properly constructed trust can be used to help minimise your Inheritance Tax exposure. Anything can be put in a trust - shares, cash, property, etc - however, once you make a gift to a trust you may not be able to benefit from the gift yourself in the future. For instance, if you put a holiday home in a trust and you still wanted to use it, you would have to pay the market value rental into a bank account created for the trust.

You must be certain that in gifting anything to a trust it will not adversely affect your quality of life in the future. You should also be aware that if you put something in a trust and you die within seven years, that asset would still form part of your estate value and would be liable for Inheritance Tax.

Under present tax laws, you are allowed to make a number of gifts that are not called back into your estate to calculate Inheritance Tax if you die within seven years of making the gift. These are referred to as 'Exempt Transfers'. It might be an idea to make maximum use of your allowances in this area. The current allowances include £3,000 each tax year, which can be given to one person or divided between a number of people. You can, in addition, give up to £250 to as many people as you like, but not to the same recipients as the £3,000 exemption. You can also give £5,000 to a child (£2,500 to a grandchild and £1,000 to others) on the occasion of their marriage, or unlimited gifts to a husband, wife, civil partner or to a UK charity.

If you make gifts of money in excess of those allowed for under the 'Exempt Transfer' arrangement you have to outlive that gift by more than seven years. If you don't, the sum of money you gifted becomes part of the calculation of your Inheritance Tax and the person who received the gift - not your estate - is liable for paying any tax owing. These are called 'Potentially Exempt Transfers'.

It is possible to make gifts from income that is surplus to your normal expenditure, but you have to be able to prove that the gift you are making will not reduce your present standard of living. If you are considering such an arrangement, your accountant and solicitor will need to work together to ensure sufficient proof is provided.

The author of this article is a part of a digital blogging team who work with brands like Access Legal. The content contained in this article is for information purposes only and should not be used to make any financial decisions.