Investments Beyond Life Part 3: What happens to your Investment Bonds when you pass?

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

1. 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.
2. 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.

How can we help?

While investment bonds, particularly offshore bonds, can offer certain benefits, the tax implications upon death of the policy holder can be complex and depend on a variety of factors. It’s important to seek professional advice to understand all potential tax implications fully and to help plan effectively.

At LFWM, we specialise in providing tailored financial advice to help you navigate the complexities of investment bonds and estate planning, providing peace of mind for you and your loved ones. If you have any queries, please get in touch with Director, Andrew Tricker (andrewtricker@lfwm.co.uk) or Chartered Financial Planner, Görkem  Barron (gorkembarron@lfwm.co.uk)

The value of investments can fall as well as rise and is not guaranteed. The Financial Conduct Authority does not regulate Tax Planning or Estate Planning.

*This blog post has been written by Lubbock Fine Wealth Management (LFWM). The opinions and views expressed are those of LFWM and do not necessarily 
reflect those of Lubbock Fine. All information provided in this blog is for informational purposes only and should not be considered professional advice. 
LFWM is not responsible for any actions taken based on the content of this blog.