When Gordon Brown announced in the April Budget an increase in the inheritance tax nil rate band, in line with the statutory rate of inflation, to £255,000, he made reference to the fact that about 95 per cent of estates do not have to pay inheritance tax.

But while this may sound reassuring in isolation, if we look at similar statements made in recent years, it is clear that the number of estates paying inheritance tax is on the increase.

Last year, the Chancellor estimated that only one in four estates would face inheritance tax liabilities, which means that an additional one per cent of estates will be paying inheritance tax in 2003/04.

This must, at least in part, be due to the fact that assets and in particular property values are rising at a rate far in excess of the two per cent by which the nil rate band has been increased.

The Chartered Institute of Taxation last year described inheritance tax as a "'ticking time bomb" and predicted that, if the nil band rate threshold continues to increase only in line with inflation, by 2020 almost every homeowner in the UK would face inheritance tax liabilities.

Let us not forget that those estates that do pay inheritance tax are heavily penalised - in the tax year 2001/02, inheritance tax receipts totalled £2.4bn and, with similar revenue estimated for 2002/3 and 2003/4, it is clear that for more and more families, estate planning should be an essential part of financial planning.

So what constitutes the value of a person's estate? Well, everything.

A married couple, for instance, may not consider themselves to be wealthy, but by combining all their assets the results can be quite surprising.

A substantial part of any estate is the home. Add to this all other assets, including personal effects, investments and life assurance policies - which can add tens of thousands of pounds to the value of an estate. Do not forget inheritances that may be received from elderly relatives, particularly again if property is involved, can have a substantial effect.

So what is Inheritance Tax and how does it affect you? On death (with certain exceptions) your heirs will pay 40 per cent tax on your total assets, including your property on amounts currently over £255,000.

This can be seen as a tax on previously taxed money, as individuals will have paid a considerable amount of tax, building up that estate in the form of income tax on both earned and investment income, Capital Gains Tax, National Insurance contributions etc.

Tax Planning is always a tempting subject to put off for another day, but nowhere is such a delay more severely punished than in the case of Inheritance Tax Planning.

It should be noted here that no tax is payable on gifts or transfers that pass to exempt beneficiaries during lifetime or on death.

These are mainly: unlimited gifts to your spouse, unlimited gifts to charities, and would you believe, unlimited gifts to political parties.

There are several ways of planning ahead to protect your beneficiaries and, consequently, your estate from the burden of Inheritance Tax.

A basic and established financial planning technique for married couples is to utilise both nil band rates. This is achieved by leaving an amount up to the current nil band rate (£255,000 2003/04) to family or to a trust on first death, thereby saving up to £102,000 tax, at current rates or second death.

The advantages of passing the nil rate band to a trust is that the surviving spouse is not cut off from access should this be required. The trust can be created during lifetime or it may be incorporated into the will to take effect on death.

The current tax regime for lifetime giving is very favourable, with the continuance of Potentially Exempt Transfers (Pets), and their use proving extremely useful. Gifts can be made to another individual, for example, heirs of grandchildren or, if some control is required, to various types of trust. Providing the donor survives for a further seven years, that gift will not form part of that person's estate.

Unfortunately, no one knows when they are going to die or how much capital they will need to provide for their needs during their lifetime. So perhaps a Whole of Life insurance policy - placed in trust for your heirs - is an effective way of providing a cash lump sum outside the estate, for beneficiaries to be able to meet inheritance tax liabilities and therefore preserve your assets for the next generation.

Everyone's personal finances and tax positions are different and it is, therefore, vital to take specialist advice in order to plan to solve your inheritance tax problems. There are many methods of avoiding or reducing tax without affecting your standard of living.

- John Dresser is an independent retirement planning specialist and director at Hennessey and Partners based in Darlington. He can be contacted on (01325) 488556.

Published: 20/05/2003