If you own an asset at death, it is subject to inheritance tax unless any reliefs or exemptions apply. This leads many people with sizeable estates, especially later in life, to start giving away assets to the next generation in order to avoid the IHT charge at death. Does this work? Yes, lifetime giving can be a very effective and successful way of reducing IHT, meaning a greater proportion of your estate passes to your loved ones and not to the Revenue. However, as with most tax planning, there are traps for the unwary.

It is not quite so simple as giving your favourite valuable painting to your son, and – bingo - IHT saved. First, you must survive seven years from the date of the gift before the gift fully falls outside of your estate for IHT purposes. Secondly, you must not retain any benefit in the asset given away.

Prior to 17 March 1986, it was entirely possible to give an asset away and claim that the asset was not "yours" even if you still continued to use it in some way. However, the government brought in the "Gifts with Reservation" rules in Finance Act 1986 to change all of that and it is not now possible to make an effective gift for IHT purposes if you do not properly part with possession of it.

Take for example, a valuable library of historic books. If you "give" them to your niece but still allow them to remain at your house, albeit on the understanding that they are "hers", this will not wash with the Revenue. You are retaining a benefit in the books by having them at your house, and they are still treated as yours for IHT purposes even if, in law, they are beneficially the niece's and not part of the estate that passes under your Will.

In the years following the Finance Act 1986, schemes were developed to try and find loopholes in the rules usually involving the family home (generally a person's most valuable asset) and how to give this away but retain the ability to live there. For a time, they worked, but new rules were introduced in 1999 to finally put a stop to those schemes. There is now very little scope to tax plan with the family home unless you are genuinely willing to give up ownership and occupation.

There do, however, remain some small let-outs where a minimal level of benefit will be tolerated. For instance, with a car that you have given away: you are permitted to receive occasional lifts in it (the Revenue advises no more than three per month). With a home: you are permitted to visit it for up to one month a year without offending the Gifts with Reservation rules. There are other examples but each only permits a very minor level of benefit which may lead some to think that the gift is not worth bothering about.

The conclusion is not to stop making lifetime gifts - they remain an excellent way to reduce your estate - but the lesson is to select the gift carefully, and only give away assets that you genuinely no longer have need of. You might otherwise be faced with the worst of both worlds: an asset that doesn't fully feel like "yours" anymore and the same IHT bill at death as would have been imposed had you simply kept the asset in the first place.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.