Taxation on death - investment bonds

Diggerswife

I have just paid IHT on my late Aunts investment bonds based on the valuation on her death. Now that probate is granted and I wan5 to surrender these I am told there is an income tax liability- is this correct 5hat beneficiaries are in effect taxed twice? Can anyone advise?

HappyHarry

Your aunt's estate might have paid inheritance tax on the capital value of the bonds.

The bond owner or estate might have to pay some income tax on any gain the bond has made.

So yes, there could be two taxes to pay, much the same as any other income producing asset on death.

However, none of the beneficiaries should need to pay any tax, it should all be paid by your late aunt's estate.

Apodemus

HappyHarry wrote: »

Your aunt's estate might have paid inheritance tax on the capital value of the bonds.

The bond owner or estate might have to pay some income tax on any gain the bond has made...

To be clear, I think that income tax is only due on any income on the bond. Not on the change in underlying value. The value at death is the base cost for calculating whether you have a capital gains tax liability when you sell the bonds. The estate has no personal allowance for income tax. Savings income is taxed at 20% and dividends at 7.5%, but I am not sure which of these rates would apply to bond income.

Aegis

The answer to this is that yes, two taxes are potentially due on death with investment bonds. These are inheritance tax, due if the estate exceeded allowances, and chargeable event tax in respect of the taxes that the bond didn't pay on income and growth during the life of the original owner. Investment bonds are designed to defer some or all of the tax on investments during the life of the original policyholder and can also pass the bond intact to another individual to make use of their tax allowances and bands on surrender.


As such, the best way to think of it is that it's not being doubled taxed on death but rather taxed on the lifetime growth at a deferred time (which may coincide with death). If the bonds were written on a capital redemption basis or if a life assured is still alive, they can be surrendered carefully to reduce the liability to higher rate tax, incidentally, so it's worth reviewing your options before either surrendering or transferring the bonds to make sure you maximise the benefit of top slicing relief available.

redpete

Diggerswife wrote: »

is this correct 5hat beneficiaries are in effect taxed twice?

In effect I get taxed twice every month with income tax and NI being taking from my gross salary, so not such an outrageous principle. (But as pointed out, it is the estate that is taxed on the income on the bond, and the estate that has inheritance tax applied, not the beneficiaries.)

Diggerswife

Hi all - thanks for all your posts - this helps clarify this complicated situation.