Inheriting a share of an investment bond.

sroberts30

I have inherited a 1/7 share of an investment bond (currently £53000 per share). My current gross income is approx £52000 (part time job + 2 x pensions), so I'm already paying 40% income tax on a proportion of this.

Will the £53000 from the bond inheritance be taxed (also at 40%)? Or will this have been dealt with under the inheritance tax?

The choices I have been given by the executor/financial consultant are:

1. Have the policy segment assigned to me and hold the investment until such time as I wish to encash.

2. Have the policy segment assigned for immediate encashment.

I don't need the cash immediately, so leaving in the bond would not be a problem. However, if I don't have to factor the £53000 into my income, I might as well get the money and invest it where I choose.

Any guidance would be greatly appreciated.

Brie

Inheritance tax is normally paid by the estate not the beneficiaries.  

And you wouldn't pay income tax until the share gives you some sort of income or there's capital gains on it.  In my opinion.

Mothman

Investment Bonds are subject to income tax not capital gains. There are two main types of investment bond 'onshore' & 'offshore and their tax treatment is slightly different.

Worth noting that if the bond segment was assigned to you and you encahsed it, the additional income would take you over £100k and so you would also loose some personal allowance. Tax payable would be dependant on the type of bond, the amount of gain and the length of time the bond was held. A top slicing relief calculation would be performed to determin how much higher rate tax was payable. Tax on investment bonds can be complex so it may be worth taking some advice or doing a lot of reading up before deciding.

Assignment can also be useful, if you have a partner you trust who is a basic rate tax payer you may be able to assign the segment to them to encash which may save some tax dependant on their other income. Though once assigned the money is technically theirs obviously.

poseidon1

sroberts30 said:

I have inherited a 1/7 share of an investment bond (currently £53000 per share). My current gross income is approx £52000 (part time job + 2 x pensions), so I'm already paying 40% income tax on a proportion of this.

Will the £53000 from the bond inheritance be taxed (also at 40%)? Or will this have been dealt with under the inheritance tax?

The choices I have been given by the executor/financial consultant are:

1. Have the policy segment assigned to me and hold the investment until such time as I wish to encash.

2. Have the policy segment assigned for immediate encashment.

I don't need the cash immediately, so leaving in the bond would not be a problem. However, if I don't have to factor the £53000 into my income, I might as well get the money and invest it where I choose.

Any guidance would be greatly appreciated.

Gains on  investment bonds are liable to income tax on encashment - see link below

https://techzone.abrdn.com/public/investment/Taxation-of-bonds#:~:text=Individuals do not pay tax,tax year of that event.


You have been given two options to avoid the bond being taxed in the deceased estate ( if that is it what now holds it).  Offering to assign segments to you avoids automatic income tax  liabilities on the gain if encashed in the estate, which would mean less money coming to you.

You will be electing option 1 since this gives you control as to how and when you are taxed on the gain.

There is key  additional information you need for your own tax planning maneuvers:

1) What was the original base cost of your bond segments, this will tell you how much of the £53,000 value contains  taxable gain.

2) How long has it been exsistence. If considerably less than 20 years, you may have the opportunity to take a certain number of cumulative 5% withdrawals, initially tax free with tax deferred until some point when you become a basic rate tax payer and fully encash the bond. Alternatively you could consider partial  encashing the bond over different tax years to mitigate any tax ultimately payable.

3) Is the bond a uk policy or offshore? This will determine whether the gross gain in 1) above is fully taxable ( if offshore) or has the benefit of 20% income tax paid at source. The abrdn link above provides  more  indepth coverage of investment bond taxation regime.

It was most irresponsible of the executor giving you the opportunity to receive the bond segments without providing any of the background information  mentioned above. No way can you make an informed decision as to your options to mitigate / quantify your tax exposure without that data.

Hopefully you can get a response quickly enough in order to take potential action ( if advantageous) during this tax year. Needless to say the other 6 beneficiaries require exactly the same information as you.

sroberts30

Many thanks to all for the guidance. I have now been informed that the bond is an Utmost Estate Planning Bond in the form of an offshore discounted gift trust investment. The trust was a lump sum investment of £200k and has been in place for 23 years, so is not subject to any inheritance tax liability. My understanding is that, if I surrender my segment immediately, it will be subject to income tax at my highest marginal rate (40%). I believe I can have the segment transferred to my wife, who is a UK non-tax payer. Can that be done by the trustee (executor of the will)? Or does it have to be transferred to me, and then I transfer it once it is in my name?
Any further guidance would be greatly appreciated.

poseidon1

sroberts30 said:

Many thanks to all for the guidance. I have now been informed that the bond is an Utmost Estate Planning Bond in the form of an offshore discounted gift trust investment. The trust was a lump sum investment of £200k and has been in place for 23 years, so is not subject to any inheritance tax liability. My understanding is that, if I surrender my segment immediately, it will be subject to income tax at my highest marginal rate (40%). I believe I can have the segment transferred to my wife, who is a UK non-tax payer. Can that be done by the trustee (executor of the will)? Or does it have to be transferred to me, and then I transfer it once it is in my name?
Any further guidance would be greatly appreciated.

Discounted gift trust schemes ( DGT ) are the pinnacle of IHT planning schemes using investment bonds as the central asset. 

This being an offshore bond variant does mean the gain element embedded within the £53k value would be added to your income and 40% tax ( for you ) would be in point.  Given the Bond has been running in excess of 20 years and the originally settlor would have had to take annual withdrawals from the investment, a large element of the remaining value coming to you would indeed be fully taxable.

You are evidently one of 7 named beneficiaries of this DGT, so whether the trustee of the DGT can redirect your segments to your wife, will depend upon whether the trust document gives them that power, and even if it does, whether they want to take on the extra work to comply with your wishes. You can ask, worse that can happen they say no.

In the event they refuse, you can always transfer it yourself once within your ownership, although this does delay when your wife is able to use her non tax paying status to access the bond gain to your advantage. 

Still, once you are able to do this, it would conclude what seems to have been a highly successful IHT mitigation scheme ( from the point of view of the original settlor), culminating in your case in potential tax free access to the accumulated bond gains assuming your wife is happy to spread her segment  encashments over a number of tax years to stay within her annual personal allowance.

As an end beneficiary of a bond held in trust, this may inspire you to look at this form of IHT planning for your own circumstances if you have children and IHT is a growing future concern.

sroberts30

Thanks for the very comprehensive explanation. It certainly makes things a lot clearer.

After reading lots about these types of trusts online, it’s definitely an IHT planning product that I will be considering myself once the dust has settled on this one!

Mothman

Please don't forget that if YOU cash in all your share in one tax year it will take your total income over £100k resulting in the loss of some personal allowance and so some additional tax to pay. Investment bonds are usually written in segments, if your inherited share is more than one segment then you may be able to split the encashment over a couple of tax years to avoid the loss of personal allowance, though there may be some additional provider cost in holding the bond for a longer period.

poseidon1

Mothman said:

Please don't forget that if YOU cash in all your share in one tax year it will take your total income over £100k resulting in the loss of some personal allowance and so some additional tax to pay. Investment bonds are usually written in segments, if your inherited share is more than one segment then you may be able to split the encashment over a couple of tax years to avoid the loss of personal allowance, though there may be some additional provider cost in holding the bond for a longer period.

Perhaps you should have read the entire thread prior to writing this?  

As indicated by the OP  the prior  responses were very comprehensive.

Mothman

poseidon1 said:

Perhaps you should have read the entire thread prior to writing this?  

As indicated by the OP  the prior  responses were very comprehensive.

And perhaps you shouldn't be so rude!

I was only reiterating my earlier point about the loss of personal allowance as the figure of 40% tax has been used by the OP & you when in fact it could be higher.

Hopefully the OP has found my contribution to the thread to be usefull even if other arrogant contributors feel only their voice is valid.