In part 3 of our ‘Investments Beyond Life' series, we explore the financial implications and processes that come into play after a loved one's passing, specifically focusing on onshore and offshore investment bonds. These bonds, issued by life insurance companies, are designed to offer a range of benefits, including potential tax advantages. Understanding what happens to these bonds when the policyholder dies is crucial, as the implications can be complex and vary based on several factors.
There are two primary ways to set up an investment bond: on a life (or lives) assured basis or a capital redemption basis. Each structure has distinct implications for how the bond is handled upon the death of the policyholder, influencing both the tax treatment and the transfer process to beneficiaries. This blog will explore these scenarios to help you better understand the potential outcomes and plan accordingly.
Life Assurance Bonds
In the event of death of the last or only surviving life assured, a ‘chargeable event' occurs, causing the bond to end. This triggers taxation of any gains as savings income, which is then added to the deceased's other income for that tax year. Consequently, there could be additional tax due, ranging from 0% to 45% depending on personal allowance and total income. This scenario can increase the tax liability of the deceased's estate.
If there are more than one life assured, the bond continues and does not come to an end. This means that the points raised above only apply upon the death of the last survivor.
Capital Redemption Bonds
If the bond is a “capital redemption” bond, in the event of the policyholder's death, the bond remains in force and does not end.
The Legal Personal Representatives (who is responsible for a settling any tax the deceased owed for the period prior to their death) have a choice on how they distribute the value of the bond to the beneficiaries in the event of a policy owners' death. They can
- Surrender the bond and pay the value of the bond to the beneficiaries. If the bond is surrendered, a ‘chargeable event' occurs, and any gains are treated as ‘estate income', distinct from savings income.
- Assign the bond to a beneficiary. This can be done without triggering a chargeable event, allowing the beneficiary to decide when to surrender the bond (and therefore when to pay the tax). Any gains will be calculated as if the beneficiary has owned the bond since inception which often makes the assignment more favourable than surrendering.
It's also worth noting that the value of the bond is typically included in the estate for Inheritance Tax purposes regardless of how they are set up.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.