Inheritance tax (IHT) has become one of the most hotly debated personal finance topics – particularly in political circles. With a new government in place, and reports it is already under consideration as one of the ways of filling an estimated budget blackhole of billions, it seems likely that some substantial IHT changes are potentially on the horizon.

Yet, despite generating a lot of headlines, comparatively speaking it affects very few families. According to the latest available statistics from HMRC , during the 2021/22 tax year 27,800 estates, just 4.39% of the total, were subject to IHT – fewer than one in 20.

The number of estates affected, however, is on the increase. That 4.39% of estates was a rise of 0.66% on the previous year and the amount recouped by the Treasury increased by 4% to nearly £6 billion. That means an average tax bill for estates paying IHT of just over £215,000 – by no means an insignificant sum, particularly at an already stressful time for the families affected.

It is unsurprising to see more people’s estates incurring IHT liabilities. The IHT nil-rate band for each individual – essentially the value to which an estate has no tax liability to pay – has been £325,000 since 2009 . Married couples and civil partners can combine their allowances, meaning they have £650,000 together.

The residence nil-rate band of £175,000 was introduced in 2017, designed to reflect the rising value of property. Again, spouses can combine these to give themselves up to £350,000 of relief on the sale of a main residence within an estate. It’s important to remember, though, that it is reduced by £1 for every £2 an estate exceeds £2 million and meeting the criteria of the nil-rate residential band can be complex.

Planning ahead is key to ensuring your assets are passed down to your loved ones. There are a range of pitfalls that can catch you out, for instance, the nil-rate band is reduced by the value of any gifts made in the seven years before death.

Placing assets in a trust can be another way of reducing potential IHT liabilities. IHT is typically charged at a rate of 40% – although, this is reduced to 36% if at least 10% of the value of an estate’s net assets are left to charity – while lifetime transfers to a discretionary trust are charged at 20% on the value of the transfer exceeding the nil-rate band.

In fact, there are a range of transfers that could be exempt from IHT. Spouses and civil partners can gift unlimited assets between one another, provided they are domiciled in the UK. The ‘annual exemption’ allows up to £3,000 to be gifted each year and wedding or civil ceremony gifts of up to £5,000 can be given to your children – or less for grandchildren and other family members.

Additionally, ‘normal gifts out of income’ exemptions allow you to give any amount of your surplus income free of IHT as long as you can maintain your standard of living. For those so inclined, you can make unlimited donations to registered charities and political parties without any inheritance issues.

There are also ways to invest that can reduce the potential tax burden on an estate. An Enterprise Investment Scheme (EIS) allows you to invest in small, unquoted, but high-risk, companies in the UK with a range of tax incentives – including that holding the shares for two years should qualify them for business relief and, therefore, make them exempt from inheritance tax.

Similar schemes are available for businesses listed on the Alternative Investment Market (AIM). But, in either case, it is important to remember these are much riskier investments than blue-chip FTSE companies and should only be used by experienced investors with access to professional financial advice.

The new government’s budget is scheduled for October 30, and it seems inevitable that there will be some major announcements affecting how families pass their wealth between generations. Regardless of what the policies might be, the best rules to follow are having conversations with your loved ones early and speaking to an adviser who can guide you through the process.

Daniel Hough is a financial planner at wealth manager RBC Brewin Dolphin