As well as the £110,000 starting point, there are many ways of giving money away exempt from inheritance tax. All gifts made more than seven years before death are totally exempt. Within the seven years before death, you will be able to give away up to £9,000 a year without it coming into the arithmetic at all.
This £7,000 exemption can be carried forward by one year. So if you make no gifts in one year you can give up to £7,000 in the next (prior to 6 April 2001 this exemption was £8,000). In addition to this exemption you can also make gifts of up to £890 each to any number of individuals in each tax year, though they cannot also gain from the £9,000 exemption.
You can give up to £12,900 to a grandchild on their wedding (or £10,000 to your own child, or £2,000 to anyone!). You can also make a gift of any size for the maintenance of a dependent relative. All these amounts will be completely ignored in the seven years before death. You can usually ignore half the value of a business which you own or control. However, any gifts outside these amounts will be added on to your estate and tax calculated accordingly. The exemptions apply to individuals, so a husband and wife can give away twice as much.
These exemptions apply only to gifts made before death. On death, different exemptions apply. Inheritance by a spouse is entirely free of the tax, though this does not mean that a couple should not worry about the tax (see 'Minimizing Inheritance Tax' on webpage 100). All legacies to a registered charity or to a political party with at least two MPs are free of inheritance tax (there are nine parties which come within the definition). There are also special exemptions for property, including buildings and works of art, which forms part of the national heritage.
Working out the tax due is quite straightforward in most cases unless you have given away so much money that the cumulative seven year total exceeds 110000 at any time within the last seven years. If you have, you can probably afford to get private advice from a specialist solicitor or accountant, and I strongly advise you to do so!
In order to work out what level of inheritance tax your heirs would face if you died tomorrow, write down the gifts you have made in the last seven years. Remember to take away the exemptions set out above from each year's total gifts.
Then add on the value of your house less any outstanding mortgage (if you do not own your house, there is far less likelihood . . . ... see: Being wealthy in retirement Rate of Tax