IHT & Investment/Insurance bonds

Malthusian

Langtang said:

Am I right in thinking, then, that the money from the bonds will form part of my MIL's estate, as she was the last to pass?

Assuming that MIL and FIL were both policyholders and both lives assured (it's still not 100% clear from the information in your posts whether that's the case, as "in the name of" can mean either):

If that is the case it was part of both their estates. On FIL's death, as with any joint assets / joint tenancy, his Will (and its 30 day survivor clause) is irrelevant; MIL automatically became sole owner. It was part of FIL's estate for IHT purposes but it matters little as it's a transfer between spouses and free of IHT.

On MIL's death the bond matured (as the last life assured had died) and the proceeds became part of her estate to be distributed in line with her Will.

This is a chargeable event so income tax may be payable in her name on the gain and there may be other tax consequences.

If there was only one policyholder then there is not enough information to say.

Langtang

Malthusian, thank you very much for your reply. Here is a breakdown, please let me know if you need any more info:

Standard Life: holder FIL. Lives covered: both
Clerical Medical: holder MIL. Lives covered: both
Scottish Widows: holder both. Lives covered: both
Aviva: holder FIL. Lives covered: both
Aviva:  holder MIL. Lives covered: both

with regards your comment saying the Will and 30 day clause are irrelevant, I was under the impression that, as MIL died 4 days after FIL that my wife would then inherit FIL estate directly as she is next in line “should she not live... 30 days...” 

Malthusian

Jointly held assets are not subject to the Will of the first to die - the surviving owner automatically becomes sole owner. The Will only deals with assets owned by the estate.

Joint assets do still form part of the estate for IHT purposes.

Langtang

I just thought I'd update this thread with things as they currently stand. 

All bonds will pay out in the name of my MIL (last to die etc.) and are included in her estate, rather than my FIL's. Thankfully, there is no IHT to pay - nor is there any Income tax to pay, thanks to top slicing & the fact that my MIL had never worked.

Alas, both of the estates seem to be stuck in Covid limbo, as neither have had confirmation granted yet!

I'd like to thank everyone who contributed, it was/is greatly appreciated.

Sea_Shell

Interesting that they form part of the estate on second death.   

My limited understanding was that as they were, in effect, life insurance policies, they would pass outside the estate, as payment of the benefits would be at the discretion of the trustees of the bonds, or subject to a nominated beneficiaries form, like other forms of life insurance.

With regards to the top-slicing, did you (the solicitors) have to claim this from HMRC to avoid a large income tax bill, as I understand only 20% income tax is deducted at source.   Were the final death payouts net of 20% income tax?

e.g., bond value on death £50,000, payout due 105% of bond value (or whatever as per the scheme) = £52,500.   Less 20% tax (£10,500) = an actual payout of £42,000?   Was the £42,000 then top-sliced over 2 years, to avoid higher rate IT being due?

(I'm trying to understand these rules myself - so trying to absorb as much info as possible)

Thanks

Keep_pedalling

Sea_Shell said:

Interesting that they form part of the estate on second death.   

My limited understanding was that as they were, in effect, life insurance policies, they would pass outside the estate, as payment of the benefits would be at the discretion of the trustees of the bonds, or subject to a nominated beneficiaries form, like other forms of life insurance.

With regards to the top-slicing, did you (the solicitors) have to claim this from HMRC to avoid a large income tax bill, as I understand only 20% income tax is deducted at source.   Were the final death payouts net of 20% income tax?

e.g., bond value on death £50,000, payout due 105% of bond value (or whatever as per the scheme) = £52,500.   Less 20% tax (£10,500) = an actual payout of £42,000?   Was the £42,000 then top-sliced over 2 years, to avoid higher rate IT being due?

(I'm trying to understand these rules myself - so trying to absorb as much info as possible)

Thanks

Insurance policies only pass out of someone’s estate if they are written into trust, and even then it has to be the right type of trust. The same with investment bonds although they also take 7 years to fall out of the estate as well.

Malthusian

Sea_Shell said:

With regards to the top-slicing, did you (the solicitors) have to claim this from HMRC to avoid a large income tax bill, as I understand only 20% income tax is deducted at source.   Were the final death payouts net of 20% income tax?

e.g., bond value on death £50,000, payout due 105% of bond value (or whatever as per the scheme) = £52,500.   Less 20% tax (£10,500) = an actual payout of £42,000?   Was the £42,000 then top-sliced over 2 years, to avoid higher rate IT being due?

With onshore insurance bonds, the equivalent of basic rate tax on income and gains is deducted within the bond.

The full proceeds are paid out to the owner.

Any chargeable gain must be declared via self-assessment and any tax due paid to HMRC. 

The full gain is taxable as income in the year it was realised. The principle behind top-slicing relief is that if you are only a higher-rate taxpayer (or additional) because of the bond gain, the gain can be divided by the number of years the bond was in for the purpose of calculating liability to higher rate tax (which may reduce to zero).

The taxation of insurance bonds is complicated and full of traps. A common error is to try to apply top-slicing relief to other tax calculations (e.g. withdrawal of personal allowance), however it only applies to calculating liability to higher rate (and if applicable additional rate) tax.

Langtang

Sea_Shell said:

Interesting that they form part of the estate on second death.   

My limited understanding was that as they were, in effect, life insurance policies, they would pass outside the estate, as payment of the benefits would be at the discretion of the trustees of the bonds, or subject to a nominated beneficiaries form, like other forms of life insurance.

With regards to the top-slicing, did you (the solicitors) have to claim this from HMRC to avoid a large income tax bill, as I understand only 20% income tax is deducted at source.   Were the final death payouts net of 20% income tax?

e.g., bond value on death £50,000, payout due 105% of bond value (or whatever as per the scheme) = £52,500.   Less 20% tax (£10,500) = an actual payout of £42,000?   Was the £42,000 then top-sliced over 2 years, to avoid higher rate IT being due?

(I'm trying to understand these rules myself - so trying to absorb as much info as possible)

No, they payout was complete, as 101%. 100% plus 1% for the chargeable event being death?

From what little I know (solicitor dealt with everything)

Actual example:

Aviva bond: 

MIL & FIL were joint bond holders and lives "insured"

£25,000.00 deposited in 1999 and never touched.

Payout was £82,155.41 (101%)

Top slicing: £57,155.41 divided by 21 years (length bond held) = £2721.68 pa

There were 6 bonds in total, however 2 had been cashed in to pay for care home fees for MIL but not recorded on his spreadsheet as such. The other 3 were similar calculations. Because my MIL never worked, and only had a small state pension, all the annual top-sliced profits didn't take her into any tax bracket over the 21 year period.

I hope I have this right, but sure someone will correct me if not.

With no family to leave our estate too, we plan on drawing down from it to exhaustion. However, we have thought about taking out a couple of theese bonds to allow for possible care home fees?

Are these seen as still Ok in todays world, or have they gone out of favour?

Keep_pedalling

Langtang said:

Sea_Shell said:

Interesting that they form part of the estate on second death.   

My limited understanding was that as they were, in effect, life insurance policies, they would pass outside the estate, as payment of the benefits would be at the discretion of the trustees of the bonds, or subject to a nominated beneficiaries form, like other forms of life insurance.

With regards to the top-slicing, did you (the solicitors) have to claim this from HMRC to avoid a large income tax bill, as I understand only 20% income tax is deducted at source.   Were the final death payouts net of 20% income tax?

e.g., bond value on death £50,000, payout due 105% of bond value (or whatever as per the scheme) = £52,500.   Less 20% tax (£10,500) = an actual payout of £42,000?   Was the £42,000 then top-sliced over 2 years, to avoid higher rate IT being due?

(I'm trying to understand these rules myself - so trying to absorb as much info as possible)

No, they payout was complete, as 101%. 100% plus 1% for the chargeable event being death?

From what little I know (solicitor dealt with everything)

Actual example:

Aviva bond: 

MIL & FIL were joint bond holders and lives "insured"

£25,000.00 deposited in 1999 and never touched.

Payout was £82,155.41 (101%)

Top slicing: £57,155.41 divided by 21 years (length bond held) = £2721.68 pa

There were 6 bonds in total, however 2 had been cashed in to pay for care home fees for MIL but not recorded on his spreadsheet as such. The other 3 were similar calculations. Because my MIL never worked, and only had a small state pension, all the annual top-sliced profits didn't take her into any tax bracket over the 21 year period.

I hope I have this right, but sure someone will correct me if not.

With no family to leave our estate too, we plan on drawing down from it to exhaustion. However, we have thought about taking out a couple of theese bonds to allow for possible care home fees?

Are these seen as still Ok in todays world, or have they gone out of favour?

They might be useful for IHT planning, but I don’t see any real advantage over something like S&S ISAs.

Sea_Shell

I'm guessing they were more popular in the days of low ISA limits!!