Nobody wants to pay inheritance tax (IHT).  If your estate is worth more than the Inheritance Tax threshold (£325,000 for the 2013-14 tax year) there are some important Inheritance Tax exemptions that allow you to make gifts to others and not have to pay tax on them when you die.

Transferring an unused Inheritance Tax threshold

Since October 2007, you can transfer any unused Inheritance Tax threshold from a late spouse or civil partner to the second spouse or civil partner when they die. This can increase the Inheritance Tax threshold of the second partner - from £325,000 to as much as £650,000 in 2013-14, depending on the circumstances.

Exempt beneficiaries or 'donees'

You can make gifts to certain people and organisations without having to pay any Inheritance Tax. These gifts are exempt whether you make them during your life or as part of your will.

You can make exempt gifts to:

• your husband, wife or civil partner, as long as they have a permanent home in the UK
• a 'qualifying' charity established in the EU or another specified country 
• some national institutions such as museums, universities and the National Trust
• any UK political party that has at least two members elected to the House of Commons or has one elected member, but the party received at least 150,000 votes

Gifts that you give to your unmarried partner, or a partner that you're not in a registered civil partnership with, are not exempt.

Annual exemption

You can give away gifts worth up to £3,000 in total in each tax year and these gifts will be exempt from Inheritance Tax when you die. You can carry forward any unused part of the £3,000 exemption to the following year, but if you don't use it in that year, the carried-over exemption expires.

In addition to the annual exemption there are other exemptions for certain types of gifts. These are explained below.

Exempt gifts

Some gifts made during your lifetime are exempt from Inheritance Tax because of the type of gift or the reason for making it.

Wedding gifts/civil partnership ceremony gifts

Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits:

• parents can each give cash or gifts worth £5,000
• grandparents and great grandparents can each give cash or gifts worth £2,500
• anyone else can give cash or gifts worth £1,000

You have to make the gift - or promise to make it - on or shortly before the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift - or if you make the gift after the ceremony without having promised it first - this exemption won't apply.

Small gifts

You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you can't give more than £250 and claim that the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether.

You also can't use your small gifts allowance together with any other exemption when giving to the same person.

Regular gifts or payments that are part of your normal expenditure

Any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle.

These include:

• monthly or other regular payments to someone
• regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries
• regular premiums on a life insurance policy - for you or someone else

You can also make exempt maintenance payments to:

• your husband, wife or civil partner
• your ex-spouse or former civil partner
• relatives who are dependent on you because of old age or infirmity
• your children, including adopted children and step-children, who are under 18 or in full-time education

The seven-year rule - 'potentially exempt transfers'

Any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift. These sorts of gifts are known as 'Potentially Exempt Transfers' (PETs).

However if you give an asset away at any time, but keep an interest in it - for example you give your house away but continue to live in it rent-free - this gift will not be a potentially exempt transfer. 

If you die within seven years and the total value of gifts you made is less than the Inheritance Tax threshold, then the value of the gifts is added to your estate and any tax due is paid out of the estate.

However, if you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate.

If you die between three and seven years after making a gift, and the total value of gifts that you made is over the threshold, any Inheritance Tax due on the gift is reduced on a sliding scale. This is known as 'Taper Relief'.

Reducing your Inheritance Tax bill by giving to charity

From 6 April 2012 if you leave 10 per cent or more of your net estate to a 'qualifying charity' your estate may qualify to pay Inheritance Tax at a reduced rate of 36 per cent.

There are different ways that you can own assets such as money, land or buildings and the way that you own the assets and with who affects the way they're treated when deciding whether the reduced rate of tax can apply.

Set up a trust

If you put some of your cash, property or investments into a trust (which you, your spouse and none of your children under 18 years can benefit from), they are no longer part of your estate.

You could set up a trust to pay for your grandchildren's education or support a family member with a disability. You can set up a trust right away or you can establish one in your will. The rules around trusts are complicated so you must take advice from an expert. Bear in mind that some types of trust might have to pay Inheritance Tax themselves.