When an investment bond client dies, paraplanners are often tasked with providing viable options for the wider family to consider. Understanding how ownership, lives assured and tax rules interact can help ensure the right actions are taken and expectations managed throughout the bereavement process. Shaun Moore – tax and trusts specialist at Quilter, gets into the details.
Investment bonds are normally written as single premium, unit-linked life assurance contracts issued as a number of identical (cluster) policies. The bond can be owned by a sole investor, or jointly, as well as by trustees and entities, while the life assured may be the bondholder(s) or another individual. The bond typically provides a death benefit perhaps 100.1% to 101% of the surrender value payable on the death of the last-named life assured.
The key consideration on death is determining whether the deceased was a bondholder, a life assured, or both. This dictates whether the bond ceases immediately or can continue after death.
Four key death scenarios
1. Sole bondholder and last life assured die
Where the deceased was both the sole bondholder and the only or last surviving life assured, the bond comes to an end. The death benefit is payable to the estate. The proceeds are then distributed according to the will or intestacy rules.
For tax purposes, the date-of-death value forms part of the estate for Inheritance Tax (IHT), while any chargeable event gain is assessed in the deceased’s final tax year.
2. Sole bondholder dies but lives assured remain
For tax purposes, the date-of-death value forms part of the estate for Inheritance Tax (IHT). As surviving lives assured remain, legal personal representatives (LPRs) have two options:
– surrender the bond and distribute cash proceeds, or
– assign ownership of the bond to beneficiaries.
The assignment option can be particularly valuable from a planning perspective because it does not trigger a chargeable event, which is considered estate income. Instead, any future gain is deferred until the beneficiary later withdraws funds or surrenders the bond.
More details on the taxation applying to LPRs can be found here.
3. Last life assured dies but there is a surviving bondholder
Where the final life assured dies but there remains a bondholder, the bond still ends but the surviving bondholder receives the proceeds.
Typically, assuming the life assured was also a joint bondholder, only the deceased’s 50% interest is included in the deceased estate for IHT purposes. If the surviving bondholder is a spouse or civil partner, the transfer will often benefit from the spouse exemption for IHT purposes. Any chargeable event gain is split equally between the deceased joint bondholder (if applicable and surviving bondholder.
4. Joint bondholder dies and lives assured remain
This is usually the simplest outcome. The bond continues automatically under the principle of survivorship, with the remaining bondholder becoming the sole bondholder. Importantly, the death itself is not a chargeable event and does not create an income tax liability.
The deceased’s 50% interest is included in the deceased estate for IHT purposes.
Practical considerations for paraplanners
Prompt notification of death is essential, enabling the bond provider to issue the appropriate claim pack and explain documentation requirements, including death certificates and probate where needed.
Paraplanners should pay particular attention to opportunities to preserve tax efficiency through assignments to beneficiaries, understand when chargeable event gains arise, and ensure executors appreciate the potential income tax implications. A clear understanding of these four scenarios will help provide effective support during what is often a sensitive and complex period for clients’ families.
A more detailed explanation of the options covered above can be found in our guide.
Main image: death, hand, candle, eyasu-etsub-j3R9C-Xqe1w-unsplash
