THOUSANDS of families could pass on £1m free from inheritance tax (IHT), even if the Conservatives don’t get into power. All they have to do is make use of several little-known perks that already exist.

Death duty was catapulted to the top of the political agenda last week when the Tories pledged to more than triple the threshold above which it is paid at 40%, from £300,000 to £1m.

Originally intended as a tax on the wealthy, 2.3m homes are now above the current IHT threshold due to the rise in property prices, according to Halifax. The number of families trapped in the net is expected to jump to 4m by 2020 if nothing is done.

Even if David Cameron, the leader of the Conservative party, does not get into power, tax experts said it was still relatively simple to shelter £1m under the current rules.

John Whiting of Price Waterhouse Coopers, the accountant, said: “It amazes me how many people simply pass their estate to their spouse, even though this is the wrong thing to do. By splitting your assets between your spouse and children, you can double up on the IHT allowance and shelter £600,000 from death duties even before you have started making gifts.”

Alistair Darling, the chancellor, will respond to the Tory proposals in his first prebudget report on Tuesday.

An exemption for transfers between sib-lings living together has been mooted, as has a lower rate of 10% or 20% on up to £500,000.

Here we offer a step by step guide to passing on £1m to your heirs free from IHT.

STEP 1: SPLIT WHAT YOU OWN

Everyone can pass on up to £300,000 of their estate without their heirs paying IHT. However, many couples don’t make full use of individual allowances by giving everything to the surviving spouse when they die.

By dividing your assets and setting up a trust in your wills you can ensure you make use of both nil-rate bands. This is a fairly simple procedure, but get legal advice.

You split the family home by changing ownership from joint tenants to tenants in common. This will mean you each own a share in the property, typically half and half, and can control what happens to it at death.

Then you update your will, leaving a share of the house and other assets in a trust to your children. Assets worth up to the nil-rate band – £300,000 this year, or higher as the threshold rises – go into the trust when you die. This is why the arrangement is known as a nil-rate band discretionary trust.

The trust gives the surviving spouse the right to live in the property until they die. Your children could force the sale of the home to get at their cash, but the trustees would have to approve this. It therefore makes sense to appoint an independent trustee.

Another way to protect your husband or wife is to draw up the trust so the whole estate passes to the surviving spouse outright, but he or she owes a debt worth up to the IHT limit to the trust set up for the children.

Amount passed tax free: £600,000

STEP 2: GIVE ASSETS AWAY

Each year you can give away £3,000 free of IHT, or £6,000 if you did not make a gift of this kind in the previous tax year. A married couple giving for the first time could therefore hand over £12,000 in one year.

If a couple started giving away surplus cash to their children or grandchildren in their sixties, for example, they could potentially pass on £6,000 a year for 20 years – or £120,000. This shows the benefit of starting early.

Amount passed tax free: £120,000

STEP 3: MAKE BIGGER GIFTS

It is possible to make further tax-free gifts – known as potentially exempt transfers (Pets) – but you have to survive for seven years to avoid IHT completely.

If you die before the seven years are up, anything you give away within your IHT limit of £300,000 is added to your estate. The amount of tax charged on amounts over £300,000 is reduced between three and seven years of making the gift.

Make a careful note of all gifts to pass on to your executor, as the Revenue pays close attention to them.

Suppose a couple with a £1m estate had used a nil-rate band discretionary trust to pass on £600,000 tax-free and had given another £120,000 away using their annual gift allowance. They could make a one-off gift of £280,000 and, as long as they lived for seven years, the entire £1m estate would be tax-free.

Amount passed tax free: £280,000

STEP 4: START EARLY IF YOU WANT TO USE TRUSTS

Many families are reluctant to make outright gifts because they worry what will happen if, say, their children divorce and then remarry.

This is where trusts come in. They allow you to give away assets but retain control.

Gordon Brown reduced their attractions when he was chancellor, but accountants say they are still worth considering.

One of the most flexible types is a discretionary trust, because they can have any number of beneficiaries.

They are often used for people who want to provide for grandchildren who are not yet born. Lifetime gifts into discretionary trusts are subject to an immediate 20% tax charge above £300,000, so the amount you give away should be below that.

Once you have used a portion of your nil-rate band, you cannot use it again for seven years. Wealthy people who have more than £300,000 to give away and want to use trusts should start planning as soon as possible.

STEP 5: USE A COMPANY INSTEAD

You could set up an investment company to hold your assets and then give the shares to your children or grandchildren. These would be free from IHT if you lived for a further seven years.

The beauty of giving shares rather than making an outright gift is that you can set up the company to put constraints on how your children or grandchildren use their shares. You could require them to seek the approval of all the directors before selling, for example.

You therefore get one of the benefits of a trust – control – but without the 20% tax charge.

STEP 6: PUT MONEY INTO YOUR BUSINESS

If you run a business, it will escape IHT once you have owned it for two years as long as it is “wholly or mainly” involved in a trade. Ronnie Ludwig of Saffery Champness, an accountant, said: “The key word here is ‘mainly’.

“You could put your investment portfolio into the business and still get the IHT exemption as long as it did not form more than half of the company.” Only consider this if you do not want to sell your business in the future.

Look to shares if you left it late

FAMILIES who have left it too late to avoid inheritance tax by making gifts are piling into investments that become free from IHT after just two years.

What’s more, there are no complicated trusts to set up. But investing in one of the plans, which are being offered by a growing number of fund managers and stockbrokers, can still be a gamble. Here we explain the pros and cons.

Where will my money be invested?

The schemes all make use of a little-known tax rule which exempts shares in many unlisted companies from death duties if they are held for two years because they qualify for “business property” relief. The majority of shares listed on the Alternative Investment Market (AIM) qualify for the perk.

IHT portfolios take your money and invest it in a spread of AIM-listed companies.

Provided the portfolio is held for a minimum of two years the original investment and any growth will be exempt from IHT.

Even if you die before the two years are up, you can transfer the portfolio to your husband, wife or civil partner without having to pay tax. So if you died after a year and a half, the portfolio passed to your spouse will become tax free after just six months.

Is the tax relief safe? There is a danger the relief could be caught up in any clampdown on business assets as part of the government’s review of private-equity tax breaks, although the focus is more on capital-gains tax rather than inheritance tax relief.

Any other downsides? Your capital is not guaranteed and AIM stocks can be very volatile because the market is dominated by smaller start-ups. AIM has fallen 4% since the beginning of August while the FTSE All-Share is up 5%.

However, the value of your portfolio would have to fall by 40% or more before you would lose the IHT benefits.

Shares in businesses that engage in “substantial” nontrading activities, such as property, finance and mining, are not generally eligible.

Is there any way to protect yourself against market falls? Three firms – Octopus, Noble Fund Managers and Fundamental Asset Management – offer schemes that exploit the IHT exemption with 100% capital protection.

Alternatively, many advisers like the scheme run by Close Fund Management, because the team there has a strong track record of investing in AIM shares.