Last updated 05:37, Friday, 01 August 2008

How does inheritance tax work? Quite simply, if all of your assets put together are worth more than £312,000 in total when you die the tax man could potentially take a 40 per cent chunk out of anything over this.

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The Government collected £3.6 billion pounds in inheritance tax (IHT) revenue in 2006/2007 tax year.

Your ‘assets’ are everything you own including your house, car or any investments or savings which you might have.

This means the tax man – and not your loved ones – will benefit from the hard-earned money you have made throughout your life.

And remember, tax rules may change in the future.

Not many people give inheritance tax a second thought. That’s because some people might believe it is a tax only the wealthy need worry about.

The truth is, you may well see that you are liable for inheritance tax.

However, it is not all doom and gloom if you are liable for inheritance tax.

The new tax rules as of October 9 2007 state that if you are married at the time you pass away, any proportion of the inheritance tax exemption that you do not use is transferred to your spouse.

But also bear in mind that any asset you give to your spouse on your death will then be added to their total estate.

What happens if you hide away from inheritance tax?

You may think that, by leaving your loved ones an inheritance, this will allow them to do the things they’ve always dreamt of.

But if you are liable for inheritance tax, not only will this be a part of your family’s inheritance taken, but your loved ones will have to pay the tax before your estate is released to them.

This may mean them having to take out a loan to pay the tax and then having to sell part of their inheritance to pay back the loan.

Do something now to stop IHT biting a chunk from your family’s inheritance. As inheritance tax is decided by law at the time you die, it’s vital that you start planning as soon as possible.

There are a number of ways to minimise, or even eliminate inheritance tax liability. Some of them are fairly simple and only require you to make minor amendments to your will, take out a whole of life policy or make gifts to friends or family. Others are more complex.

Sensible planning now could make a big difference in the future.

With good advice and careful planning, inheritance tax can be reduced or avoided altogether.

By talking to a financial consultant at your local Cumberland Building Society branch, you can find out more about what options are available and which approach would best suit you.

If you would like further information on inheritance tax, please contact one of the financial consultants at your local Cumberland Building Society branch.

Any financial advice will relate only to the products and services of the Cumberland Building Society and Norwich Union.

Steve Hardman is financial services controller at the Cumberland Building Society. Visit the website at www.cumberland.co.uk

This article should not be relied upon when making investment decisions. Always obtain financial advice.