BANKS and insurers are cashing in on fears about inheritance tax by pushing costly avoidance schemes which advisers fear are being mis-sold to vulnerable consumers.

Stephen Byers, the former cabinet minister, condemned inheritance tax (IHT) last week as “unfair and punitive” and called for it to be scrapped.

Supporters of Gordon Brown, the chancellor, were quick to stamp on his comments, insisting only 6% of estates pay the tax, which is levied at 40% on assets above £285,000 including your home.

However, Halifax estimates that the number of properties valued above the threshold will nearly triple to 4.2m by 2020, pushing more and more families into the IHT net.

Banks and insurers have been busy relaunching two types of tax scheme, called discounted gift trusts and loan trusts, which are now among the few legitimate ways to beat the taxman.

Tens of thousands of families have already taken out the schemes and thousands more are expected to sign up now the chancellor has closed so many other avenues.

The schemes seem to promise the impossible: they allow you to give away assets in your lifetime to minimise your tax bill while enabling you to continue benefiting from the cash.

But advisers warn the plans are often costly, complex and may not be as tax-efficient as claimed. Salesmen may also be tempted to sell them to clients for whom they are unsuitable because of the hefty commissions. They often earn as much as 7% upfront and 0.5% each year, well above the average.

Mike Warburton at Grant Thornton, an accountant, said: “Some advisers are undoubtedly encouraged to sell the schemes because they pay good commissions.”

Fiona Sielski Waters, a Sunday Times reader from Kent, found herself battling with Barclays after one of its financial planning managers advised her parents to invest more than £700,000 in two schemes.

Sielski Waters believes the plans were completely unsuitable and exposed her parents to unnecessary risk. They were told to cash in their National Savings certificates and Pensioners Bonds, which offer capital guarantees. The proceeds were placed in a Legal & General insurance bond through both a gift trust and a loan trust, with no capital protection.

She is also unhappy about the commission the adviser pocketed from the sale, which came to more than £60,000.

Sielski Waters said: “The sale seemed to be cynically made for the commission rather than because it was in my parents’ best interests.”

The bank has accepted that the advice it offered on one of the schemes — a loan trust — was inappropriate and has offered nearly £18,000 in compensation. But it remains adamant that its advice regarding the second plan, a gift trust, was correct, forcing Sielski Waters to pursue her claim with the Financial Ombudsman Service.

Loan trusts are designed for people who want to give away assets, but retain the right to draw on their original capital.

You make a payment to a trust, which is treated as an interest-free loan to the trustees. The trust can then repay your loan capital in instalments, so you are in effect drawing an income. You also have the right to order the trust to repay the loan if you need the capital.

If you loaned capital of £100,000 to the trust and drew an income of 5% a year, you would have withdrawn all your capital after 20 years, so it would not count towards your estate for IHT.

If you died before you had withdrawn all the original capital, the outstanding amount would form part of your estate so there would still be an IHT bill. However, any investment growth could be passed to your heirs free from IHT.

The success of the underlying investments in a loan trust is therefore vitally important as it is the growth in the trust that benefits your heirs. The underlying investments for these schemes are generally insurance bonds, which some advisers have been reluctant to recommend in the past because of poor performance.

The average UK equity insurance fund is up 70% over 10 years compared with the average unit trust in the same sector, which is up 98%. Insurers have been widening the choice of funds, however, and some will allow almost any, including unit trusts, to be used.

Higher-rate taxpayers can take an income of 5% a year from the trust for 20 years with no immediate tax to pay. But they would be liable for 20% tax on their gains after 20 years if they are alive. On death, your beneficiaries may have to pay tax as well, so you may not be passing on assets completely tax-free. There could also be a 6% tax charge every 10 years on assets in the trust above the nil-rate band of £285,000, depending on the type of trust used, following the chancellor’s budget clampdown.

Discounted gift schemes are more tax-efficient but less flexible. They are designed for people who do not need access to their capital and want to pass it to their heirs free from IHT, but who want to retain the right to draw a fixed regular income which would be taxed as above.

Say you had an estate worth £385,000 — £100,000 above the IHT threshold. You would give £100,000 to a bare trust for the benefit of your heirs, which would normally be classed as a “potentially exempt transfer” — it would be free from IHT as long as you lived for another seven years.

Even if you died within seven years, your heirs could still benefit from a big saving. Your right to draw an income from the gift during your lifetime reduces the value of the potentially exempt transfer, so they would have less tax to pay.

For example, if a 71-year-old man made a £500,000 gift into a discounted gift trust, its value could be cut to only £280,000, according to Merchant Investors, an insurance company.

Any growth in the value of the insurance bond would also fall outside your estate whether or not you lived for a further seven years.

Check on the type of trust used or you could face a tax charge of 20% on the initial gift above £285,000 plus 6% every decade.