Life assurance bond and tax

MBenn80

Hi

My mother passed away earlier this year and as part of her estate, she left a life assurance bond.

Upon her death a changeable event occured and the bond was paid out to her executors, me and my sister.

I received a letter soon afterwards with a chargeable event certificate within which it gave an amount of tax treated as paid - 20% of the gain of the policy.

This feels like the income tax that would be liable on this bond. It wouldn't be enough to have pushed my mother into a higher tax band.

I'm not sure what to do here. The letter states that HMRC have been informed, so my feeling is that I don't need to do anything with this. However, I'm about to report the estates income to HMRC and wondered if this is something I should include.

I should state that we did include the bond in the valuation of the estate following my mother's death.

Keep_pedalling

These type of bonds are subject to IT on the death of the bond holder. I don’t think this counts as estate income but is added to her income in the tax year she died. If that was early this tax year there could be a refund due as she would have had received little other income for the year.

It is in effect deferred income that belongs to her rather her rather than the estate (that is my understanding anyway, and am happy to be corrected)

https://www.bennettbrooks.co.uk/news-events/blog/death-and-taxes-on-investments-bonds/#:~:text=On%20the%20death%20of%20a,deceased%2C%20as%20a%20lifetime%20matter.

Linton

If I have understood the bond correctly as a standard investment bond which does have a small life assurance component, it is taxed as income but with basic rate income tax having already been paid by the provider. As you say the lump sum did not put her into the higher rate band then there should be no income tax to pay.

I dont see the proceeds of redeeming the bond as income, although it is potentially liable to income tax.  It seems to be more realisation of an asset.

mybestattempt

This explains the position:

https://www.gov.uk/government/publications/gains-on-uk-life-insurance-policies-hs320-self-assessment-helpsheet/hs320-gains-on-uk-life-insurance-policies-2024#part-5--examples-of-calculations

poseidon1

Key points to note from the HMRC  HS320 guidance note:

1 ) Insurance company has already issued a certificate calculating the policy gain on death, so no requirement for you to calculate independently.

2) Top slicing relief is not available on death of the policy holder, so that whole section on how that works can be ignored.

3) If the policy gain when added to your mother's income  results in a  total exceeding £10,000, then self assessment return must be submitted for the deceased.

Finally regarding IHT, you state you did not include a valuation of bond at date of death, on your mother's IHT return ( and so rendering it potentially liable to IHT ).

Unless your mother had written the bond in trust for you and your sister ( in which case there is an automatic chargable gain tax charge on the trust and none of forgoing points above apply) , then it is certainly an asset of your mum's estate and should  have been reported on an IHT return ( if you did one).

No harm done if bond valuation at death together with her other assets  is still comfortably  within your mother's nil rate bands, but you could be courting trouble with HMRC if the bond would have  pushed her above the threshold. HMRC don't take kindly to understating or omitting estate assets.

You say you consulted a solicitor, did this issue not arise?

MBenn80

Thanks all. Just to reiterate, we did state the bond value in the IHT calculation, so I think that should be ok 

stevec611

poseidon1 said:

Key points to note from the HMRC  HS320 guidance note:

2) Top slicing relief is not available on death of the policy holder, so that whole section on how that works can be ignored.

HS320 is rather more ambiguous than this about whether top slicing relief is available.   There is a question about it  on the HMRC community forums, where the HMRC reply, rather than clarifying, instead refers on to IPTM3240.

I'm not able to post links, but searching for 

commmunity hmrc Investment Bonds, Death, Chargeable Gains, Top Slicing

ought to find it.