Inheritance tax: how the system works

Every tax year, each person can give away £3,000 of assets and they will not count towards their estate for inheritance tax.

If the taxpayer does not use up the full exemption in one year, they can carry it forward to the next, but for one year only. Gifts of up to 250 to an unlimited number of different individuals are also tax-exempt, but both exemptions cannot be used to give to the same person.

A total of 5,000 can be given to a taxpayer's child as a wedding gift. Grandparents can hand over 2,500, and anyone else can give 1,000. Gifts between husbands and wives are always inheritance tax-free, as are donations to charities and political parties.

If a gift is regularly made out of income and does not affect a person's standard of living, any amount can be given away and ignored for inheritance tax purposes.

Other tax-free gifts, called "potentially exempt transfers", can also be made, as long as the taxpayer lives for another seven years.

If someone fears they will not live for seven years, they can set up a decreasing-term insurance policy that will cover any inheritance tax bill.