Many people ask, “Are investment bonds subject to inheritance tax?” The answer is “yes.” The bonds are not subject to inheritance taxes when they are sold or transferred. The cost basis of the asset will be adjusted to reflect the value of the inherited assets. Upon the death of the owner, the remaining value of the bond will be assessed alongside the other income. However, there are several important differences between inherited and non-inherited bonds.
If the investment bonds are held in an absolute trust, the settlor of the trust will choose beneficiaries who cannot be changed. The investment bonds are considered part of the beneficiary’s estate, which means they aren’t included in the IHT estate. In addition, the settlor of the trust must exclude all benefits from the investment bonds. Unless the investment bonds are held in a loan trust, the growth of the bond is not taxable for IHT purposes.
If a person dies, the proceeds of his investment bond are subject to inheritance tax, which is 40% of its value. The inheritance tax can be avoided by settling the bond in a discretionary trust for his wife and children. In the case of PS50,000, a life insurance policy will avoid the burden of inheritance tax. Consequently, the proceeds of the investment bond will be transferred to his wife and children without any further consideration.
When a person dies, the value of investment bonds becomes part of his estate for inheritance tax purposes. In such cases, he or she will pay income tax on any gain. Nevertheless, there is a way to defer the tax indefinitely. As long as the bond is held until maturity or converted to HH bonds, the inheritance tax will not be paid. There are certain circumstances in which an individual may be able to defer payment of the taxes on their investment bond.
There are many situations where a person can transfer their investment bonds and still avoid paying inheritance tax. In such cases, they can use an absolute trust to hold their investment bonds. Unlike a trust that allows the settlor to change beneficiaries, the gifting of an absolute bond is regarded as a transfer of value. The surviving co-owner can benefit from the income tax on the interest earned from the investment bond.
Investing in bonds can be more flexible and tax-efficient than transferring an investment to another person. The nil-rate band for inheritance tax is PS325,000, so the value of investment bonds in a trust must be less than this amount. The amount of a bond is not deductible from a deceased person’s income or capital gains. Inheritance tax is a significant factor in the sale of a bond.