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How Are Investment Bonds Treated in an Estate?

· 33 min

Note: The following scenario is fictional and used for illustration.

Michael, 58, held a £180,000 offshore investment bond he'd built up over 15 years for retirement. When he died unexpectedly, his wife discovered three problems: the bond's surrender value had grown to £280,000, creating a £40,000 chargeable gain taxed at 40% (£16,000 income tax); the entire bond value counted toward their £520,000 estate, pushing them £195,000 over the nil-rate band (£78,000 inheritance tax); and probate was delayed three months while the bond provider calculated the exact valuation. His family faced a combined £94,000 tax bill that could have been reduced to £31,200 if Michael had placed the bond in a discounted gift trust seven years earlier.

Michael's story isn't unique. HMRC inheritance tax receipts reached £7.5 billion in 2023-24, with investment bonds increasingly contributing to estates that exceed the threshold. Research shows 65% of advisers expect increased client interest in investment bonds for inheritance tax planning. Yet most bond holders don't understand how their investments are valued and taxed at death.

This guide explains exactly how investment bonds are valued and taxed when you die, the difference between onshore and offshore bonds for estate planning, and three proven strategies to reduce inheritance tax on bonds while maintaining access to your money.

Table of Contents

Are Investment Bonds Part of Your Estate?

Yes, investment bonds form part of your estate for inheritance tax purposes. Whether you hold onshore bonds (UK-based providers like Prudential, Aviva, or Legal & General) or offshore bonds (Isle of Man, Dublin, or Guernsey providers like Quilter International or RL360), the surrender value at the date of death is included in your estate total.

Your estate for inheritance tax includes all property you beneficially own immediately before death. Investment bonds are counted as estate assets at their surrender value, regardless of whether you use them for income or hold them for growth.

This applies equally to both onshore and offshore bonds. The term "offshore" refers to where the bond provider is based, not whether the bond escapes UK inheritance tax. If you're UK-domiciled, your worldwide assets—including offshore investment bonds—are subject to UK inheritance tax.

Emma holds a £150,000 onshore bond with Prudential. At death, this £150,000 is added to her estate total. If her total estate (house, savings, bonds) equals £450,000, she exceeds the £325,000 nil-rate band by £125,000. This results in £50,000 inheritance tax due at the 40% rate on estates above the nil-rate band.

The only exception is bonds written in trust. If you place an investment bond in trust, the bond is owned by the trust rather than you personally. These bonds aren't part of your estate and bypass probate entirely. We'll explore how trusts work in detail later.

David, 62, held £200,000 in offshore bonds. He assumed "offshore" meant the bonds wouldn't count in his UK estate. He was wrong. The £200,000 was added to his £380,000 home, creating a £580,000 estate and £102,000 inheritance tax bill for his children.

Understanding that all investment bonds count toward your estate is the first step in planning effectively. The real question isn't whether bonds are included, but how to minimize the tax impact through strategic planning.

How Investment Bonds Are Valued at Death

Investment bonds are valued at their surrender value immediately before death, not at the original investment amount or current market value. This surrender value is what you'd receive if you cashed in the bond the day before death.

You must contact the bond provider directly to obtain the official valuation needed for probate applications. Each provider (Prudential, Aviva, Scottish Widows, Quilter International, RL360, or others) has a bereavement team that handles these requests.

The provider issues a valuation certificate showing the surrender value at the date of death. This value is used for both the probate application and inheritance tax forms submitted to HMRC. The certificate typically arrives within 2-4 weeks of your initial contact.

For jointly owned bonds, the situation differs. When one bondholder dies, ownership typically transfers to the surviving owner automatically. No valuation is needed until the second death, when the full surrender value is included in the surviving owner's estate.

Segmented bonds require special attention. Many modern investment bonds allow segmentation, where the original bond is divided into multiple identical segments. If you've previously assigned some segments to others, each remaining segment is valued separately at death.

James invested £100,000 in an onshore bond 10 years ago. At death, the surrender value was £165,000 due to investment growth. His executor contacted Aviva, received the valuation certificate within three weeks, and used the £165,000 figure in the probate application. The £65,000 gain was also subject to income tax on the deceased's final tax return.

The practical steps for obtaining a bond valuation are straightforward:

Step 1: Locate bond policy documents showing the policy number and provider name.

Step 2: Contact the provider's bereavement team with the death certificate (original or certified copy).

Step 3: Request the surrender value at the date of death for probate purposes.

Step 4: Use the valuation on form IHT400, line 105 for life assurance and annuities.

Don't attempt to estimate the value yourself using recent statements. Markets fluctuate daily, and the official surrender value may differ from the last statement you received. The provider's valuation is the only figure HMRC accepts for probate and inheritance tax purposes.

What Happens When a Bondholder Dies: The Chargeable Event

Death triggers what tax law calls a "chargeable event," causing the bond to end and any gains to be taxed as income. This is separate from inheritance tax and catches many families by surprise.

Under the Income Tax (Trading and Other Income) Act 2005, death is a chargeable event that ends the bond contract. The tax consequences can be significant, particularly for bonds held for many years with substantial growth.

The chargeable gain equals the surrender value at death minus your original investment and any previous withdrawals. This gain is taxed as savings income, not capital gains, and is added to the deceased's income for that tax year.

The tax rate depends on the deceased's marginal rate (20%, 40%, or 45%). Because the gain is added to other income for the year of death, it can push the estate into a higher tax bracket. Top-slicing relief may reduce the tax if the bond was held for multiple years, by spreading the gain over the years of ownership for calculation purposes.

Legal personal representatives (executors) must include the chargeable gain in the deceased's self-assessment tax return for the year of death. The bond provider issues a chargeable event certificate (form R185) showing the exact gain and any tax already paid.

Sarah invested £80,000 in an offshore bond 12 years ago. At death, the surrender value was £130,000, creating a £50,000 chargeable gain. She'd taken £20,000 in 5% withdrawals over the years under the tax-deferred withdrawal allowance.

Her total income in the year of death was £40,000 from her pension and other sources. Adding the £50,000 bond gain brought her total income to £90,000. After the personal allowance of £12,570, £77,430 was taxable. The first £37,700 was taxed at 20% (basic rate), while £39,730 was taxed at 40% (higher rate), resulting in £23,432 income tax due on the bond gain.

However, top-slicing relief reduced this significantly. The £50,000 gain divided by 12 years equals £4,167 per year. This calculation showed that most of the gain wouldn't have pushed Sarah into higher-rate tax if it had been spread over the years she held the bond. The actual tax after top-slicing relief was £18,200, saving £5,232.

This double taxation—inheritance tax on the bond's value plus income tax on the gain—creates the substantial tax bills many families face. A £100,000 bond with a £40,000 gain could generate £16,000 in income tax (at 40%) plus £40,000 in inheritance tax if it pushes the estate over the nil-rate band, totaling £56,000 in tax on a £40,000 gain.

Understanding chargeable events is crucial for estate planning. The tax isn't avoidable if you hold the bond until death, but strategic timing and trust planning can minimize the impact.

Onshore vs Offshore Bonds: Estate Planning Differences

The distinction between onshore and offshore investment bonds matters significantly for estate planning, though both are included in your estate for inheritance tax purposes.

Onshore bonds are issued by UK-based insurance companies like Prudential, Aviva, and Legal & General. The insurance company pays 20% corporation tax on fund growth inside the bond wrapper. This creates a tax credit that reduces your personal liability when gains are realized.

For basic-rate taxpayers, the 20% corporation tax already paid means no additional tax is due on gains. Higher-rate taxpayers pay an additional 20% (40% total minus 20% credit). In trusts, trustees pay an effective 25% on gains (the 45% trust rate minus the 20% credit).

Offshore bonds are issued by providers based in the Isle of Man, Dublin, or Guernsey, such as Quilter International, Old Mutual, and RL360. These bonds benefit from gross roll-up, meaning no corporation tax is paid on fund growth inside the wrapper.

The potential for faster growth over long periods is the main advantage. Without the 20% tax drag, investments compound more quickly. However, gains are taxed at your full marginal rate (20%, 40%, or 45%) on chargeable events, with no tax credit.

Offshore bonds also offer wider investment choice, including international funds and currencies unavailable in UK-regulated onshore bonds. This flexibility appeals to investors with global portfolios or those planning to become non-UK resident.

For trusts, the tax difference is dramatic. Offshore bonds in trust see gains taxed at the full 45% trustee rate, while onshore bonds enjoy the 20% credit, reducing the effective rate to 25%.

Here's how they compare for estate planning:

Feature Onshore Bond Offshore Bond
Included in estate? Yes (surrender value) Yes (surrender value)
IHT rate 40% on value above nil-rate band 40% on value above nil-rate band
Income tax on death 20%-45% (with 20% credit) 20%-45% (no credit)
Trust tax rate 25% (effective) 45%
Growth potential Modest (20% tax drag) Higher (gross roll-up)
Best for Basic-rate taxpayers, UK-focused Higher-rate taxpayers, international planning

Robert, a higher-rate taxpayer, chose an offshore bond for gross roll-up benefits. Over 15 years, his £100,000 grew to £210,000 at 7.5% annual growth. An equivalent onshore bond would have grown to approximately £195,000 due to the 20% corporation tax drag, a difference of £15,000.

When he cashed in the offshore bond, he paid 40% tax on the £110,000 gain, totaling £44,000. An onshore bond would have cost £22,000 (20% after the tax credit). However, Robert planned ahead. He retired and dropped to basic-rate taxpayer status the following year. He then cashed in the offshore bond, paying only 20% tax (£22,000), the same as an onshore bond but with £15,000 more growth.

Choose onshore bonds if you're a basic-rate taxpayer, planning to stay in the UK, and want simplicity. The 20% tax credit matches your tax rate, meaning no additional tax on gains.

Choose offshore bonds if you're a higher-rate taxpayer, planning non-UK residency, want international investment options, or can strategically time withdrawals for low-income years. The gross roll-up advantage compounds significantly over decades.

For estate planning specifically, both bond types behave identically for inheritance tax purposes. The surrender value is included in your estate at 40% above the nil-rate band. The choice between onshore and offshore affects the income tax treatment during your lifetime and at death, not the IHT treatment.

Investment Bonds and Inheritance Tax: What You'll Pay

Calculating inheritance tax on investment bonds requires understanding how bonds interact with your total estate and available allowances.

The nil-rate band for 2025-26 is £325,000, frozen until 2030-31. If you pass your home to direct descendants (children or grandchildren), you may also qualify for the residence nil-rate band of £175,000.

Married couples and civil partners can combine allowances, creating a potential £1 million tax-free threshold (£325,000 + £175,000 + £325,000 transferred + £175,000 transferred).

Inheritance tax is charged at 40% on the value above your available threshold. Investment bonds are added to your estate total at their surrender value, potentially pushing you over the threshold.

Assets passing to your spouse or civil partner are exempt from inheritance tax, regardless of value. However, this simply defers the tax. The bonds increase the surviving spouse's estate, potentially creating a larger tax bill on the second death.

Let's examine three scenarios:

Scenario 1: Single person, no property

Estate composition: £200,000 in savings plus £150,000 investment bond equals £350,000 total.

Available nil-rate band: £325,000 (no residence nil-rate band without property passing to descendants).

Taxable amount: £25,000.

Inheritance tax due: £10,000 (40% of £25,000).

Scenario 2: Married couple, property and bonds

Estate composition: £400,000 home plus £100,000 savings plus £200,000 bonds equals £700,000 total.

Available allowances (assuming spouse previously deceased): £325,000 nil-rate band plus £175,000 residence nil-rate band plus £325,000 transferred nil-rate band plus £175,000 transferred residence nil-rate band equals £1,000,000 combined allowance.

Taxable amount: £0 (estate below £1 million threshold).

Inheritance tax due: None.

Scenario 3: Large estate with gifted bond

Estate value at death: £450,000 (house and savings).

Previously gifted £120,000 offshore bond to daughter five years ago as a potentially exempt transfer.

Donor dies within seven years, so the gift is added back to the estate.

Total estate: £450,000 plus £120,000 equals £570,000.

Available allowances: £325,000 nil-rate band plus £175,000 residence nil-rate band equals £500,000.

Taxable amount: £70,000.

Base inheritance tax: £28,000 (40% of £70,000).

Taper relief applies because the gift was made 5-6 years before death, providing a 20% reduction.

Final inheritance tax due: £22,400 (£28,000 minus £5,600 taper relief).

Taper relief reduces inheritance tax on gifts made 3-7 years before death:

  • 3-4 years before death: 32% IHT (20% reduction)
  • 4-5 years before death: 24% IHT (40% reduction)
  • 5-6 years before death: 16% IHT (60% reduction)
  • 6-7 years before death: 8% IHT (80% reduction)
  • 7+ years before death: 0% IHT (gift completely exempt)

Bonds passing directly to your spouse create no immediate inheritance tax liability, but they increase your spouse's estate. Strategic planning considers the combined estate value across both deaths.

Bonds assigned to children or other individuals as potentially exempt transfers start the seven-year clock. If you survive seven years, the bond value and all future growth is removed from your estate permanently.

Bonds held in discretionary trusts may be potentially exempt after seven years, depending on the trust structure and when it was established. Professional advice is essential for trust-based inheritance tax planning.

Three Strategies to Reduce IHT on Investment Bonds

Strategic planning can significantly reduce inheritance tax on investment bonds while maintaining varying levels of control and income access.

Strategy 1: Gift the Bond Directly (Assignment)

You can assign an investment bond or specific bond segments to beneficiaries as a potentially exempt transfer without triggering an immediate tax charge. This is more tax-efficient than cashing in the bond and gifting cash.

If you survive seven years after the assignment, the bond value plus all future growth is removed from your estate permanently. Future gains are taxed on the recipient when they eventually cash in the bond, potentially at their lower tax rate if they're basic-rate taxpayers.

However, you lose access to the bond capital entirely. You cannot take withdrawals from assigned segments. This strategy works best for people who don't need the bond capital and want to remove it from their estate completely.

Linda, 65, held a £200,000 onshore bond with 10 segments of £20,000 each. She assigned five segments (£100,000) to her daughter Amy, a basic-rate taxpayer. No immediate tax charge occurred on the assignment.

Linda survived eight years. The £100,000 had grown to £145,000 by the time of Linda's death. This entire amount was outside Linda's estate for inheritance tax purposes, saving £58,000 in IHT (£145,000 × 40%).

When Amy eventually cashed in the segments, she paid 20% tax on the gains because she remained a basic-rate taxpayer. If Linda had held the segments until death, the gains would have been taxed at Linda's 40% rate, doubling the income tax bill.

Strategy 2: Place Bond in a Discounted Gift Trust

A discounted gift trust allows you to place a bond in trust while retaining rights to regular withdrawals, typically using the 5% annual allowance available on investment bonds.

The "gifted" portion equals the bond value minus the discounted present value of your withdrawal rights. An actuary calculates this discount based on your age, health, and planned withdrawal amount. This gifted portion is a potentially exempt transfer.

You maintain an income stream from the bond while reducing your estate. After seven years, the gifted portion plus all growth is outside your estate. The trust also bypasses probate, allowing trustees to distribute funds directly to beneficiaries without waiting for the grant of probate.

This strategy suits people who want to reduce their estate but need ongoing income from the bond. The withdrawal rights you retain remain in your estate, but the discounted gift and growth escape inheritance tax if you survive seven years.

Peter, 68, put his £300,000 offshore bond in a discounted gift trust. He retained rights to 5% withdrawals (£15,000 annually). An actuary calculated his withdrawal rights were worth £120,000 in present value terms, considering his age and life expectancy.

Gifted portion: £300,000 minus £120,000 equals £180,000 potentially exempt transfer.

Peter survived seven years. At his death, the bond had grown to £420,000. His estate included only the theoretical £120,000 discounted value of his withdrawal rights, though he'd already taken most withdrawals before death.

His beneficiaries received £420,000 outside his estate, bypassing probate entirely. Inheritance tax saved: £168,000 (the growth from £180,000 to £420,000, plus the original £180,000 gift) × 40% equals £67,200 saved.

Strategy 3: Loan Trust

A loan trust involves lending capital to trustees who invest in an investment bond. The loan remains in your estate, providing no immediate inheritance tax benefit on the capital itself. However, all bond growth sits outside your estate from day one.

You can request loan repayments at any time, maintaining full access to the original capital. On death, the outstanding loan is repaid to your estate from the bond proceeds, and any growth goes to beneficiaries completely free of inheritance tax.

This strategy freezes your estate value while you maintain complete capital access. It's ideal for people who want to prevent their estate from growing further but aren't ready to give up access to their money.

Rachel, 70, lent £250,000 to a loan trust, which the trustees used to purchase an offshore bond. Over 10 years, the bond grew to £410,000. Rachel took £80,000 in loan repayments during this period for living expenses and gifts to grandchildren.

At death, the outstanding loan was £170,000 (£250,000 original loan minus £80,000 repaid). The bond value was £330,000.

Trustees repaid the £170,000 outstanding loan to Rachel's estate (included for inheritance tax). Beneficiaries received £160,000 (the bond growth) completely free of inheritance tax.

Inheritance tax saved: £160,000 × 40% equals £64,000.

Here's how the three strategies compare:

Strategy Estate Reduction Income Access Capital Access 7-Year Rule
Direct Gift Full bond value None None Yes (PET)
Discounted Gift Trust Gifted portion only Regular withdrawals No capital access Yes (PET)
Loan Trust Growth only (not capital) Loan repayments Full access No (immediate)

Each strategy offers different trade-offs between estate reduction, income access, and control. The right choice depends on your income needs, how much control you want to retain, and your estate size relative to the inheritance tax threshold.

Investment Bonds in Trust: How They Work

Bonds held in trust are not part of your estate because the trust owns the bond, not you personally. This fundamental distinction creates significant estate planning advantages but also brings registration requirements and tax complexities.

Most trusts holding investment bonds must be registered with HMRC's Trust Registration Service, particularly if the bond has regular withdrawal features. The common exclusion for simple bare trusts doesn't typically apply to investment bonds with the 5% withdrawal allowance.

Registration must occur within 90 days of establishing the trust. You'll need the trust deed, settlor details, trustee information, and beneficiary details. HMRC issues a Unique Taxpayer Reference for the trust, which trustees use for tax returns.

During your lifetime, if you're the settlor and remain UK resident, you're typically taxed on bond gains under the settlor-interested trust rules. This means assigning bonds to trust doesn't defer income tax during your lifetime, though it provides inheritance tax benefits.

After your death, trustees are taxed on gains at 45%. For onshore bonds, the 20% corporation tax credit reduces this to an effective 25%. For offshore bonds, trustees pay the full 45% with no credit. This significant difference makes onshore bonds more attractive for long-term trust planning.

Trustees can assign bond segments to beneficiaries without triggering a chargeable event. This flexibility allows tax-efficient distribution, as beneficiaries are then taxed on gains at their personal rates when they cash in the segments.

The trust bypasses probate entirely. When you die, the bond continues in trust ownership. Trustees distribute funds according to the trust deed, not your will, and beneficiaries receive money without waiting for the grant of probate.

Three common trust types are used with investment bonds:

Bare trust: Beneficiaries have an immediate absolute entitlement to the trust property. The bond legally belongs to the beneficiary, with trustees holding it until the beneficiary reaches 18. Gains are taxed on the beneficiary, not the settlor or trustees, at the beneficiary's personal tax rate.

Discretionary trust: Trustees have full discretion over distributions to beneficiaries. This provides maximum flexibility but comes with 45% tax on gains and 10-year anniversary charges for inheritance tax purposes. Best for large estates where flexibility is worth the tax cost.

Gift trust (absolute trust): A simple structure for absolute gifts where the settlor gives up all rights. The settlor is taxed during their lifetime, but the bond bypasses probate and leaves the estate after seven years. Commonly used with discounted gift trusts.

Andrew placed £150,000 in a bare trust for his grandson Tom, age 10. Tom is the legal beneficial owner, but trustees hold the bond until Tom turns 18. When the bond is eventually cashed in, Tom—not Andrew—is taxed on gains.

If Tom has no other income, his personal allowance (£12,570) and starting rate for savings (£5,000) mean the first £17,570 of gains could be tax-free. Andrew removed £150,000 from his estate, and Tom will pay minimal tax on the gains when he accesses the money at 18.

Establishing a bond trust requires:

Step 1: Choose the trust type based on your control needs. Bare trusts give you no control but offer the lowest tax rates for beneficiaries. Discretionary trusts give you maximum control but higher tax rates.

Step 2: Complete the trust deed using your bond provider's trust form. Most providers offer standard trust templates designed specifically for investment bonds.

Step 3: Register the trust with HMRC's Trust Registration Service within 90 days if registration is required. Most investment bond trusts with withdrawal features must be registered.

Step 4: Trustees manage the bond, making investment switches and fund changes without triggering tax charges. The bond wrapper protects against tax on internal transactions.

Step 5: On your death, the bond continues in trust. Beneficiaries receive distributions directly from trustees without probate delays. The bond value and growth are outside your estate if you survived seven years after establishing the trust.

Trusts are powerful tools but complex. Professional advice from a solicitor or financial adviser is essential before establishing any trust structure. The wrong trust type or poor execution can create unexpected tax liabilities.

How to Include Investment Bonds in Your Will

Most investment bonds should be included in your residuary estate rather than as specific bequests. This provides flexibility and avoids problems if you cash in or change bonds before death.

A specific bequest names a particular asset: "I leave my Prudential onshore bond (policy number 123456) to my daughter Emily." This seems clear but creates risks. The bond might be cashed in years before you die, the policy number might change, or you might switch to a different provider.

When a specifically bequeathed item no longer exists at death, the gift fails through ademption. The beneficiary receives nothing, even if you have other similar assets.

Marcus's will left "my Aviva offshore bond" specifically to his son. Marcus cashed in that bond three years before death and bought an RL360 bond instead, seeking better fund options. The specific bequest failed completely. His son received nothing from the RL360 bond, which fell into the residuary estate and was distributed to different beneficiaries. Marcus's intention was frustrated by a technicality.

The residuary estate includes all assets not otherwise specifically disposed of in your will. Including bonds in your residuary estate provides maximum flexibility. You can cash in bonds, switch providers, or change investment strategies without affecting your will's validity.

A better approach uses percentage bequests of your residuary estate: "I leave 30% of my residuary estate to my daughter Sarah and 70% to my son James. My residuary estate includes all assets not otherwise disposed of, including investment bonds."

This approach ensures all your bonds, regardless of provider or value changes, are distributed according to your wishes. The percentages automatically adjust to whatever bonds exist at death.

Keep a separate asset inventory document listing bond providers and policy numbers. Update this inventory as needed without changing your will. Your executor uses this inventory to locate bonds but isn't bound by it if circumstances change.

For will drafting purposes:

Do: Include bonds in your residuary estate for flexibility.

Do: List bond providers and policy numbers in a separate asset inventory that you update as needed.

Do: Instruct executors to contact bond providers for valuations and include these in the estate total.

Don't: Make specific bequests of bonds unless a particular bond is critical to your estate plan.

Don't: Assume bond values will remain stable. They fluctuate with investment markets and withdrawals.

Don't: Forget that bonds in trust aren't disposed of by your will. The trust deed controls them.

A sample will clause for bonds: "I direct my executors to contact all investment bond providers to obtain surrender values at the date of my death, and to include these values in my residuary estate for distribution to my beneficiaries in accordance with clause [X] of this will."

This clause gives executors clear authority to contact providers without naming specific bonds that might change. The surrender values flow into your residuary estate and are distributed according to your residuary beneficiary clauses.

If you have bonds in trust, your will should acknowledge this: "I note that I am the settlor of the [name] Trust dated [date], which holds an investment bond for the benefit of [beneficiaries]. This bond is not part of my estate and is not disposed of by this will."

This clarification helps executors understand that the trust bond should be handled separately from estate assets and prevents confusion during probate.

Probate and Investment Bonds: What Executors Need to Know

Executors face specific responsibilities when handling investment bonds during probate. Understanding the valuation process, tax reporting requirements, and distribution options prevents costly mistakes.

Step 1: Locate bond policies

Start by searching the deceased's paperwork, safe, and filing cabinets for bond policies and annual statements. Look for communications from providers like Prudential, Aviva, Scottish Widows, Quilter International, or RL360.

Check emails for provider correspondence and contact any known financial advisers who may have arranged the bonds. Many executors discover bonds they didn't know existed through systematic searching.

Step 2: Notify bond providers of death

Contact each provider's bereavement team as soon as possible. You'll need the death certificate (original or certified copy), the bond policy number, and your details as executor.

Request the surrender value at the date of death for probate purposes and ask for the chargeable event certificate (form R185) showing any taxable gain. Most providers respond within 2-4 weeks with the official valuation.

Step 3: Obtain and record valuations

The provider sends a valuation certificate showing the surrender value immediately before death. This is the figure you use on inheritance tax forms, not the original investment or any recent statement balance.

Include the bond surrender value on IHT400 form at box 105 for life assurance and annuities. Complete the IHT410 schedule providing detailed information about each bond.

Keep the valuation certificate with your probate application documents. You may need to provide it to the Probate Registry if questions arise about estate valuation.

Step 4: Complete inheritance tax and income tax forms

The bond's surrender value is part of the estate total for inheritance tax purposes. Include it when calculating whether the estate exceeds the nil-rate band and how much inheritance tax is due.

Separately, declare the chargeable event gain on the deceased's self-assessment tax return for the year of death. The gain is taxed as savings income at the deceased's marginal rate. Calculate the income tax due and pay it before distributing the estate.

Don't forget top-slicing relief, which can significantly reduce the income tax on long-held bonds. The relief spreads the gain over the years the bond was held to determine the effective tax rate.

Step 5: Decide whether to cash in or assign

You have two options for distributing bonds to beneficiaries:

Option A: Cash in the bond. You surrender the bond to the provider, receive the proceeds into the estate account, and distribute cash to beneficiaries according to the will. This is simple but triggers immediate taxation at the deceased's rate.

Option B: Assign bond segments to beneficiaries. You transfer ownership of the bond or specific segments to beneficiaries without cashing in. No immediate tax charge occurs. Beneficiaries control when to cash in and are taxed at their own rates.

Option B offers significant advantages if beneficiaries are lower-rate taxpayers than the deceased. They can cash in the bond when it suits their tax position, potentially saving substantial tax.

Step 6: Distribute proceeds or assign segments

If you cash in the bond, transfer the proceeds from the estate account to beneficiaries according to the will's instructions. Provide beneficiaries with details of any income tax paid on the chargeable gain.

If you assign segments, complete the provider's assignment form with beneficiary details. The provider transfers legal ownership to the beneficiaries, who then control the bond going forward.

Executor John handled his mother's £220,000 offshore bond. He contacted Quilter International and received the valuation certificate showing £220,000 at death. He completed IHT400 including this value in the estate total.

The chargeable gain was £95,000 (£220,000 surrender value minus £125,000 original investment). John filed his mother's final tax return and paid £38,000 income tax at the 40% higher rate.

Rather than cashing in the entire bond, John assigned four segments worth £88,000 to his sister, who was a basic-rate taxpayer. She cashed in these segments the following year and paid just 20% tax on her share of the gain. This saved the family £19,000 in total tax compared to cashing in everything at the deceased's 40% rate.

Common executor mistakes to avoid:

Mistake 1: Cashing in bonds immediately without considering assignment. This triggers maximum tax at the deceased's rate when beneficiaries might pay less.

Mistake 2: Forgetting to declare the chargeable event gain on the deceased's tax return. HMRC will eventually discover this and charge penalties and interest.

Mistake 3: Using market value or recent statement balances instead of the official surrender value for inheritance tax purposes. Only the provider's valuation is acceptable.

Mistake 4: Distributing estate assets before paying the income tax on bond gains. Executors are personally liable if they distribute assets and insufficient funds remain to pay tax.

Mistake 5: Assuming all bonds are in the estate. Bonds in trust aren't part of the estate and shouldn't be included in probate valuations.

Taking time to understand these steps and considering assignment rather than automatic surrender can save beneficiaries thousands in tax while ensuring full compliance with HMRC requirements.

Frequently Asked Questions

Q: Are investment bonds subject to inheritance tax in the UK?

A: Yes, investment bonds form part of your estate for inheritance tax purposes. The surrender value at the date of death is included in your estate and taxed at 40% if your total estate exceeds the £325,000 nil-rate band. However, strategies like placing bonds in trust or gifting can reduce IHT liability if you survive seven years after the gift.

Q: What happens to an investment bond when the bondholder dies?

A: When the bondholder dies, a chargeable event occurs and the bond ends. The surrender value immediately before death is included in the estate for IHT purposes. Any gain is assessed on the deceased's income tax return for that year and taxed as savings income. Legal personal representatives must obtain a valuation from the bond provider for probate.

Q: What's the difference between onshore and offshore bonds for estate planning?

A: Onshore bonds benefit from 20% tax credit from corporation tax paid by UK providers, making gains taxed at 20% for basic-rate taxpayers (25% in trusts). Offshore bonds offer gross roll-up with no internal tax, potentially growing faster over time. Both can be placed in trust for IHT planning, but offshore bonds may suit higher-rate taxpayers better due to tax deferral benefits.

Q: How are investment bonds valued for probate?

A: Investment bonds are valued at their surrender value on the date of death. You must contact the bond provider directly to obtain the official valuation needed for probate applications. This value is included in the estate total when calculating whether inheritance tax is due and when completing IHT forms for HMRC.

Q: Can I gift an investment bond to reduce my estate?

A: Yes, you can assign an investment bond to another person without triggering an immediate tax charge. If you survive seven years after the gift, the bond's value and any future growth is removed from your estate for IHT purposes. Segmented bonds allow you to gift portions to multiple beneficiaries while retaining some segments yourself.

Q: Do investment bonds in trust avoid probate?

A: Yes, investment bonds held in trust bypass probate entirely. The bond is owned by the trust, not your estate, so trustees can distribute funds directly to beneficiaries without waiting for probate. This speeds up access to funds and removes the bond value from your estate for IHT if you survive seven years after establishing the trust.

Q: What is a chargeable event on an investment bond at death?

A: A chargeable event occurs when the bondholder dies, causing the bond to end. This triggers income tax on any gains made since the bond started. The gain is calculated as the surrender value minus the original investment and previous withdrawals, then added to the deceased's income for that tax year and taxed at their marginal rate.

Conclusion

Investment bonds are powerful wealth-building tools, but understanding how they're treated in your estate is essential for protecting your family from unexpected tax bills.

Key takeaways:

  • Investment bonds are valued at surrender value on the date of death and included in your estate for inheritance tax—contact providers immediately after death for official valuations
  • Death triggers a chargeable event, taxing any gains as income on your final tax return at 20-45% depending on your marginal rate—executors must declare this on your self-assessment
  • Onshore bonds offer a 20% tax credit (effective 20-25% tax on gains), while offshore bonds provide gross roll-up but full taxation—choose based on your tax rate, residency plans, and need for international investment options
  • Three strategies reduce IHT: direct gifting removes bonds from your estate after seven years, discounted gift trusts maintain income while reducing your estate, and loan trusts freeze estate value while keeping full capital access
  • Bonds in trust bypass probate and remove value from your estate, but require HMRC registration if they include withdrawal features—trustees can assign segments to beneficiaries tax-efficiently

Investment bonds are complex financial products whose tax treatment differs significantly from simpler assets like cash or ISAs. Without proper planning, your beneficiaries could face six-figure combined tax bills from both income tax on chargeable gains and inheritance tax on the bond value.

Understanding how bonds are valued, taxed, and transferred at death allows you to protect the wealth you've built and ensure your family receives the maximum benefit from your careful investing.

Need Help with Your Will?

Investment bonds require careful estate planning to minimize tax and ensure smooth transfer to beneficiaries. Including bond details in your will and considering trust strategies protects your family from unexpected liabilities.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.

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