Investment bonds on death of holder

[chris]

Hi

I am a bit confused on the tax surrounding investment bonds on death. My aunt had 2 bonds with different companies and whilst she had made partial withdrawals, at death there seems to be a chargeable event of the whole gain on these bonds, some £120k.

I have worked out the top slicing relief on these as they were held for 30 and 15 years and the gain keeps her within the basic rate band, although with the total gain, she loses her personal allowance so there is tax on the pension that was paid tax free under her personal allowance.

What I do not understand is that with us having to effectively pay tax on the gain, why it should form part of her estate for IHT purposes. Surely that is taxing it twice? I've never taken out such a bond and so is there tax relief when you take them out? Otherwise I am struggling to see the benefit of investing in these.

Could anyone enlighten my simple mind?

Chris

[Dod101]

I don't think I can enlighten you but if for instance you hold shares and there is a chargeable gain at the date of death then that is wiped out and the value at the date of death simply goes into the estate and taxed (or not) for IHT. I would have thought the same thing applies to investment bonds but you will need to check. As you say otherwise she is being charged twice, potentially at least.

Dod

[meldrewlives]

@Chris,

If you google <UK tax regime for 'investment bonds'> there's lots of what looks like useful information. You can take your pick.

[chris]

Hi

I can assure you that I have read around the subject and most of those links that come up with a Google search. They all talk about the gain on death and having read up I know both about top slicing relief and the fact that with a large gain, despite the top slicing, you can lose your personal allowance. However none seem to go into the fact that after death it seems to form part of an income tax calculation and also there is a value for IHT calculation on the estate. That is what I need to know about. Because it doesn't make sense to me, I am not sure what the IHT position is because the chargeable gain for income tax is clear and we have had chargeable event certificates from them.

Chris

[Alaric]

What I do not understand is that with us having to effectively pay tax on the gain, why it should form part of her estate for IHT purposes. Surely that is taxing it twice? I've never taken out such a bond and so is there tax relief when you take them out? Otherwise I am struggling to see the benefit of investing in these.

You may have seen this link
http://www.cii.co.uk/knowledge/personal ... eath/39047
which confirms the double taxation.

If you like, the Chargeable Event regime is the mechanism for collecting higher rate tax, there not being any additional tax for Basic Rate payers.

Where these Bonds are used is where Trusts are involved. This can mitigate IHT if sufficiently convoluted.

Otherwise as you suggest, it's taxed twice if the Chargeable Event causes tax to be payable.

[chris]

Hi Alaric

Thanks for your reply which at least confirms that there is IHT and income tax to pay. However, I still do not get why a retired schoolteacher would have been advised to invest in this. There doesn't seem to be any benefit in the way that it is taxed, quite the reverse in fact as it would be much easier to partly sell and avoid CGT as gains accrued. On death, there would be a benefit to having it in another form so there must be some reason why the gain is taxed as income which makes me think that there was an income tax benefit when it was invested. I think that there is some sort of life assurance linked to it but since this was minimal if anything at all on death, I am really not convinced.

I just wish I could understand what it is about these investments that give rise to an income tax liability rather than capital gain...

Chris

[chris]

Hi Alaric

Thanks for your reply which at least confirms that there is IHT and income tax to pay. However, I still do not get why a retired schoolteacher would have been advised to invest in this. There doesn't seem to be any benefit in the way that it is taxed, quite the reverse in fact as it would be much easier to partly sell and avoid CGT as gains accrued. On death, there would be a benefit to having it in another form so there must be some reason why the gain is taxed as income which makes me think that there was an income tax benefit when it was invested. I think that there is some sort of life assurance linked to it but since this was minimal if anything at all on death, I am really not convinced.

I just wish I could understand what it is about these investments that give rise to an income tax liability rather than capital gain...

Chris

[Alaric]

However, I still do not get why a retired schoolteacher would have been advised to invest in this.

It's likely that a higher commission or equivalent would have been paid on these bonds than the possible alternatives of OEICs and direct investments in ITs or otherwise.