Gift income or capital to reduce Inheritance tax?

As there is an inheritance tax ('IHT') exemption for gifts of income it's often asked whether it it better to give away excess income and be taxed on the full estate at death, or give large sums of money now to children as potentially exempt transfers ('PETs')? This is the $64,000 question and would probably depend crucially on the size of the estate in question. If the estate was large it may well be worthwhile considering a transfer of a proportion of any capital to reduce the estate to the value of the nil rate band. This would be a PET, and provided the person making the gift survived for at least 3 years, a form of taper relief would apply to potentially reduce the amount of IHT charged. If he survived for a period of seven years after the date of the gift, the value of the gift would be excluded from his estate for IHT purposes. These PET's could also be combined with regular payments out of income, to further reduce the size of any estate although these would presumably be reduced as the available income would also be reduced.