The £8.4 million tax bill faced by Princes William and Harry following the death of their mother, Princess Diana, in a car crash may be the most high profile case of inheritance tax in recent years.

But every year thousands of Irish people are faced with similar, if smaller, tax bills on their legacies. And the sums collected by the Revenue Commissioners have been increasing steadily in recent years as the value of property, particularly in Dublin, has soared.

Official figures show that receipts from inheritance tax slipped to £39.9 million in 1995, from £43.7 million two years earlier but have since soared, rising by 95 per cent, to an estimated £78 million last year.

The combination of rising house prices and smaller families mean that far more people now find themselves in breach of the thresholds above which Capital Acquisitions Tax (CAT) - which covers both gifts and inheritances - must be paid.

The escalation in house prices has caused particular problems for certain groups, including the growing number of cohabiting couples. According to the 1996 census, there were some 78,911 couples cohabiting on their own or with children in the State.

Unlike spouses, who are exempt from inheritance tax, such couples are seen as strangers in the eyes of the law and often face hefty tax bills on the death of one partner.

Another group that has been badly hit in recent years are elderly siblings living together as the death of one often leaves the other facing a huge tax bill. Although relief for such people has been introduced, the rapid rise in property prices has caused difficulties for many. In worst case scenarios, people have had to sell their home in order to settle the tax bill.

Financial advisers say that up until recently, most parents focused on paying school and college fees and after that, children were able to fend for themselves. But the dramatic rise in house prices in recent years has meant many people, including those in well-paid jobs, can no longer afford to purchase a property and parents are increasingly helping children out to get on the first rung of the property ladder. However, those who buy a house for their offspring, or gift them money above a certain level, should be aware that their children may incur a tax liability.

Accountants note that CAT, which is based on an aggregation system, is both a very emotive and very complicated area of taxation. Basically, there are three classes of threshold depending on the relationship between the donor and recipient.

The Revenue Commissioners announced the inheritance tax thresholds for 1999 recently, increasing them in line with consumer price inflation. The Class A threshold, which covers bequests from parents to children, was set at £192,900, up from £188,400 last year.

Class B, with a threshold of £25,720, covers legacies from near relations including grandparents, siblings and aunts or uncles. Class C, where the threshold was set at £12,860 for 1999, covers all other gifts or bequests.

Inheritance tax is set at 20 per cent on the first £10,000 above the threshold level, 30 per cent on the next £30,000 and 40 per cent on the balance.

Tax on gifts is charged at 75 per cent of inheritance tax but the gift-giver must survive the gift by at least two years, a clause designed to ensure that people don't try to reduce inheritance tax by giving away everything on their death-bed.

Despite the property boom of the past three years, the inheritance tax thresholds have increased only modestly - the Class A threshold, for example, has risen by just 5.7 per cent since 1996. But given the double digit annual increase in house prices over the same period, this means the thresholds are a lot less generous than they once were and even modest dwellings now breach the tax-free limits.

The system is also very complicated - one accountant described its drafting as "ingenious" - particularly if people inherit across a range of classes. Thus, a person inheriting £50,000 from their mother and £100,000 from their father at a later date pays no tax.

But the aggregation system means that someone who inherits £12,000 from their great aunt and is later left £100,000 by their father may face a tax bill on the first legacy. "People can end up paying tax in circumstances where they didn't expect it," says Ms Dervilla Whelan, partner at accountants O'Hare & Associates.

There are, however, some ways of reducing the liability. Most financial advisers say advance planning is crucial and fundamental to this is drawing up a will. People should also consider taking advantage of the lower gift tax rate by giving away some of their wealth before they die - although accountants warn people to ensure that they remain well provided for.

Dividing up the inheritance between a number of relations is another option worth considering. For example, a grandparent with £250,000 to bequeath might consider splitting it equally between his grandchildren and daughter rather than leaving it all to her. This way, none of the recipients breaches the inheritance tax threshold.

There are also a number of exemptions from inheritance tax. In addition to spouses, these include nieces and nephews who are effectively treated as sons or daughters in certain circumstances and inheritances for public or charitable purposes.

Cohabiting couples trying to find a solution to their inheritance problems could consider taking out a Section 60 life assurance policy or each partner could insure the other's life in order to provide for the tax bill in the event that one partner dies.

Inheritance tax is a self-assessment tax since 1989 and the obligation to make a return rests with the person who receives the legacy. Those who have to pay may take some cold comfort from the fact that it may not all have to be paid at once. Typically, inheritance tax falls due within four months of the valuation date, the date on which the value of the gift or inheritance is ascertained.

However, the tax on an inheritance of house or lands may be paid in five yearly instalments although the Revenue Commissioners charge interest at one per cent per month. Those who inherit property can consider a number of options such as renting the property and using this source of income to pay the tax. Alternatively, it may be worthwhile to consider taking out a bank loan to pay the Revenue bill while repaying the loan at a lower rate of interest or over a longer period of time.