Parents are cashing in on the economic downturn’s silver lining by passing on battered share portfolios and property to their children — and so cutting their tax bill.

The FTSE 100 peaked at 6,731 in October 2007 and closed on Friday 39% lower at 4,093, while 21% has been wiped off property prices since they started falling in November that year.

While losses are nothing to cheer about, plummeting values — and tentative signs that the worst might be over — have led to a surge in people crystallising losses to turn them to their advantage, accountants say.

“The economic climate offers a major opportunity for people to limit their tax bills — and we’re seeing a jump in parents looking to pass assets tax-free through the generations,” said Nigel May at MacIntyre Hudson.

“It requires a degree of bravery to permanently part with your assets, but proper planning can make a huge difference to the amount you pass on to your children — and the amount you pass on to the taxman.”

Gifts from parents to children usually incur capital gains tax (CGT) if they have risen in value, but no tax is levied if the value falls, meaning families are able to give away second homes and shares without having to pay tax.

Such transactions are also exempt from inheritance tax (IHT) provided the person who makes the gift survives seven years after the handover. Here, we explain the rules:

INHERITANCE TAX

The IHT threshold, or nil rate band, rose at the start of the new tax year on April 6 from £312,000 to £325,000 a person, so £650,000 for couples. Anything over this is subject to 40% tax on your death, but gifts are taxed on a tapering basis for seven years, after which they drop out of your estate entirely.

Price Waterhouse Coopers, the accountant, said it had seen a “significant” increase in IHT-related inquiries as people take advantage of falling asset prices.

Say you had buy-to-let property which had dropped in value to about £200,000 from £250,000. If this asset was in your estate when you died, your beneficiaries would be liable to pay £80,000 in IHT. However, if you gave it away and survived for seven years, there would be no IHT to pay and any rise in the property price made since would count towards your children’s estate.

So, say the value had risen back to £250,000 by the time you died, giving away the asset would in effect have saved your beneficiaries £100,000 in tax.

David Henderson, 62, and his wife Anne, 60, a retired couple from Leeds, have decided to pass on their buy-to-let to their daughter Sarah. The three-bedroom flat in Leeds was worth £235,000 — but is now valued at only £165,000. “Now seems a perfect opportunity to pass on some of our assets without paying the taxman any more than we need to,” said Henderson. The same applies to share portfolios. Gifting a portfolio worth £100,000 could perhaps save your beneficiaries £40,000.

Other than the “seven-year rule”, there are other annual gift allowances that help to minimise IHT. You can give £3,000 a year to any one person, and each parent can give up to £5,000 to each adult child as a wedding gift. You can also make any number of small gifts of up to £250, regular gifts out of income and gifts to charities free of IHT.

Be warned that you do have to give up the asset you gift. Taking any benefit from a gift — such as staying in a property after giving it away without paying a market rental rate — can mean IHT is applied as if you had never made the gift.

“Think carefully about the cost of getting older, too, including any long-term care you may need in future before being overly generous with your assets,” said Ian Young at the Institute of Chartered Accountants.

CAPITAL GAINS TAX

If your profits have fallen below the CGT allowance or tumbled into negative territory, crystallising them will reduce your tax bill.

The CGT threshold was £9,600 in the 2008-09 tax year and the new limit will be announced in next week’s budget, but is expected to be up 5% to more than £10,000.

Suppose you had shares showing a gain of £12,000, but this had fallen 25% to £9,000 due to the credit crunch. You could pass these shares to your children with no tax to pay.

If you have made a capital loss on your share portfolio, this can generally be carried forward indefinitely to offset against future gains. You must notify the taxman of losses within five years.