Tax and legal expert Emma Chamberlain answers your questions on how the Budget affects you and IHT

Will I need to change my will?

You will certainly need to review your will if you have left any assets in trust. This includes any trust set up for your surviving spouse because the assets may no longer be exempt from inheritance tax on your death even if they pass to your spouse.

I own no assets held in trust apart from a life policy to pay out for my dependents. Am I likely to be affected?

If you have a life policy that is written in trust for your spouse or children, inheritance tax may well be payable on the proceeds when you die.

Are deeds of variation of wills affected?

Deeds of variation are often used to re-write someone’s will more tax effectively. At present it appears that these are not directly affected by the proposals in that any variation would still be treated as made by the deceased.

I am getting divorced. The house and other assets are being left under a court order on trust for my wife to be split between us when my children reach 18. Am I affected?

Yes. This transfer may well be chargeable to inheritance tax because spouse exemption is no longer available. It is possible you can argue that there is no tax due because you are not making a gift. However, even then there may be ongoing inheritance tax charges on the trust assets whenever capital is distributed and every ten years. You should wait until the draft legislation appears in early April.

I am the beneficiary of an existing trust and the assets are to pass to my spouse on death. Will the assets still be exempt from inheritance tax?

If you die after 2008 the assets will no longer qualify for the spouse exemption.

I set up a trust for my grandchildren/children some time ago. How are they affected by the proposals?

Beneficiaries of these sorts of trusts (often used for school fees) will need to take both income and capital no later than 18 to avoid an inheritance tax charge after this. If they are already entitled to income nothing needs to be done.

What is the rate of inheritance tax payable?

If you set up any trust now in your lifetime the rate of tax will be 20 per cent on the value of the gifted property. However, if you have made no earlier transfers the first £275,000 is taxed at 0 per cent. Thereafter the trust will suffer tax at a maximum of 6 per cent every ten years and on capital distributions although it is likely that this rate will rise.

Can I make gifts to people outright?

You can still make gifts to individuals outright. As long as no trust is involved and you survive seven years there is no inheritance tax payable. You should not add to trusts or make new trusts. Almost all such transfers could suffer inheritance tax.

Why are trusts being penalised?

The Government appears to dislike assets being held in trust even when the trust is set up in a will and hence the requirement that the children must take at 18.

Can I now do anything to my existing trusts?

The Government has given a transitional period until 2008 during which trusts can be varied. However, minor children will generally need to take outright at 18 to avoid inheritance tax penalties and existing trusts may need to be ended. Capital gains tax may well be triggered if you terminate existing trusts so take advice first.

Emma Chamberlain, a barrister, is a member of the Technical Group of the Society of Trust and Estate Practitioners and Chair of Capital Taxes Committee, Chartered Institute of Taxation