IHT on Investment Bonds UK: Inheritance Tax on Onshore and Offshore Bonds (2026)
Investment bonds — onshore or offshore — are included in the IHT estate at their surrender value on death. Offshore bonds are NOT automatically IHT-exempt; their offshore location makes no difference to IHT for UK-domiciled policyholders. To remove a bond from the estate it must be assigned into trust during the policyholder's lifetime.
| Bond / Policy Type | In IHT Estate? | IHT Value | Notes |
|---|---|---|---|
| Onshore investment bond (not in trust) | Yes | Surrender value at death | Fully in estate — no IHT advantage |
| Offshore investment bond (not in trust) | Yes | Surrender value at death | Location irrelevant for IHT (UK domiciled) |
| Investment bond assigned to trust | No (trust asset) | N/A (periodic/exit charges) | PET or CLT on assignment; trust holds bond |
| Whole-of-life policy in trust | No (trust asset) | N/A — pays death benefit to trust | Premiums may be normal expenditure from income |
| Term life policy in trust | No (trust asset) | N/A — pays benefit if dies within term | GIV plan covers PET taper period |
| Term policy NOT in trust | Yes — proceeds in estate | Policy proceeds at death | Beneficiary pays IHT on death benefit received |
Investment Bonds and IHT: What You Need to Know
What is an investment bond and how is it held?
An investment bond is a single-premium life insurance policy used as an investment vehicle. Onshore bonds are issued by UK-regulated life insurance companies (e.g. Prudential, Aviva, Royal London). Offshore bonds are issued by insurers in low-tax jurisdictions (Ireland, the Isle of Man, Guernsey, Jersey, Cayman Islands). Both types allow the policyholder to invest a lump sum, withdraw up to 5% per year tax-deferred, and choose from a range of underlying funds. The bond is a 'wrapper' — the underlying investments are held by the insurer; the policyholder holds a personal contract. A key practical point for IHT: the policyholder is the legal and beneficial owner of the bond. On death, the surrender value of the bond (the market value of the underlying investments) is included in the deceased's estate for IHT. There is nothing inherently IHT-efficient about an investment bond — the bond simply holds assets in a tax-efficient income-tax wrapper. The IHT treatment is the same as for cash or a stocks-and-shares ISA held in the estate.
The offshore bond IHT myth: they ARE in the estate
The most common misconception about offshore bonds is that their offshore domicile makes them IHT-exempt. This is incorrect. The location of the issuing insurer is not relevant for IHT purposes. What matters for IHT is: the domicile of the policyholder. A UK-domiciled (or LTUR-status) individual is subject to IHT on their worldwide estate — including offshore investment bonds issued by insurers in Ireland, the Isle of Man, or the Channel Islands. The offshore bond is a personal contract — it is an asset of the UK-domiciled policyholder. Its surrender value at the date of death is included in the IHT estate at full value. The offshore tax deferral advantage of an offshore bond (no UK income tax on gains within the bond — only on surrender or withdrawal, as a chargeable event) does not extend to IHT. The offshore bond does not 'sit outside' the estate by virtue of being offshore. An individual who holds £500,000 in an offshore bond at death has £500,000 of estate value — the same as if they held £500,000 in a UK bank account.
To remove a bond from the IHT estate: assign it into trust
The only way to remove an investment bond from the estate is to assign (transfer) it into a suitable trust during the policyholder's lifetime. Assignment of the bond to a trust is treated as: (1) For IHT: the assignment is a gift — either a Potentially Exempt Transfer (PET) if the trust is a bare trust or IPDI, or a Chargeable Lifetime Transfer (CLT) if the trust is a discretionary/relevant property trust. The PET or CLT starts the seven-year clock. (2) For income tax: the assignment of an offshore bond into a trust is a 'chargeable event' only if it is an assignment for money or money's worth (s488 ITTOIA 2005). An assignment into trust for no consideration is NOT a chargeable event — no immediate tax on the bond gains. (3) For CGT: investment bonds are not chargeable to CGT — their gains are charged to income tax via the chargeable events rules. The trust then holds the bond as its asset; when the policyholder dies, the bond is not in their IHT estate (it is in the trust). The trust may then: continue to hold the bond; or surrender the bond (triggering a chargeable event — income tax on the gain, attributed to the trust or beneficiaries).
Whole-of-life bonds written in trust: funding the IHT bill
A whole-of-life insurance bond written in trust is one of the most common IHT planning tools used by financial advisers. The structure: (1) The policyholder takes out a whole-of-life insurance policy (not an investment bond — a protection policy with a guaranteed death benefit). (2) The policy is immediately assigned to a discretionary trust. (3) On the policyholder's death, the policy pays out the death benefit to the trust — outside the estate. (4) The trustees use the lump sum to pay the IHT bill on behalf of the beneficiaries. Because the policy is in trust, the death benefit is not part of the estate and is not itself subject to IHT. Monthly premiums paid from income can qualify as normal expenditure from income (s21 IHTA 1984) — themselves exempt from IHT. The practical benefit: the beneficiaries receive the estate assets intact (the IHT is funded from the trust, not from the estate). The cost: monthly premiums, which increase with age and health condition. For a couple, the most common structure is a 'second death' policy (pays on the death of the survivor, when IHT becomes due) — as no IHT is owed on the first death between spouses.
The gift inter vivos bond: covering a PET in taper relief
A 'gift inter vivos' plan (GIV plan) is a decreasing-term life insurance product designed to cover the reducing IHT liability on a Potentially Exempt Transfer (PET) during the seven-year taper relief period. When a person makes a large PET and dies within seven years, IHT taper relief applies from year 3 — reducing the IHT charge from 40% to 8% over years 3–7. The GIV plan: (1) Is taken out at the time the PET is made. (2) The sum assured decreases over seven years to track the reducing IHT liability (accounting for taper relief). (3) The plan is assigned into trust for the donee at the outset. (4) If the donor dies within seven years, the plan pays a lump sum (matching the IHT liability for that year of taper) to the trust — the funds are available to pay the IHT on the estate or the failed PET. (5) After seven years, the plan has expired — it is no longer needed because the PET is now fully exempt. GIV plans are particularly valuable where the donor has made a large cash gift (or gift of investment bond proceeds) and wants to ensure the recipient is not landed with an unexpected IHT bill if the donor dies early.
Investment bonds and the IHT estate: what to declare on IHT400
On death, the executor must include the surrender value of any investment bond as at the date of death in the IHT estate return (form IHT400, Schedule IHT410 — Life assurance and annuities). The surrender value at date of death is the open market value under s160 IHTA 1984. For bonds in trust: the bond is NOT included in the deceased's personal IHT estate — but the trustees must account for the trust separately (relevant property regime periodic charges if a discretionary trust). For bonds NOT in trust: the full surrender value is included. Note: where the deceased is a UK-domiciled policyholder of an offshore bond, the surrender value of the offshore bond is in the worldwide estate. Chargeable event gains: any income tax liability arising on the bond (as a chargeable event on death — the full gain from the bond) is NOT deductible from the IHT estate as a liability. Income tax is assessed on the personal representatives (PRs) or beneficiaries separately from IHT. Both taxes can therefore apply to the same bond value.
Frequently Asked Questions
Are offshore investment bonds outside the IHT estate?
No. Offshore investment bonds are personal property included in the IHT estate of a UK-domiciled policyholder at their surrender value on death. The offshore location of the issuing insurer does not make the bond IHT-exempt. A UK-domiciled individual pays IHT on their worldwide estate — including offshore bonds issued in Ireland, the Isle of Man, or the Channel Islands. The only way to remove an investment bond from the IHT estate is to assign it into a suitable trust during the policyholder's lifetime.
How do you get an investment bond outside the IHT estate?
Assign the bond into trust during the policyholder's lifetime. The assignment is a gift for IHT purposes — either a PET (if the trust is a bare or IPDI trust) or a CLT (if it is a discretionary trust). No income tax chargeable event arises on an assignment for no consideration. After assignment, the bond is held by the trust and is not in the policyholder's personal estate on death. Trustees then hold the bond for the named beneficiaries — and the periodic and exit charges of the relevant property regime apply if the trust is discretionary.
What is a whole-of-life bond written in trust for IHT?
A whole-of-life insurance policy (protection bond) assigned to a discretionary trust pays a death benefit outside the IHT estate. The trustees use the proceeds to pay the IHT bill, leaving the estate assets intact for beneficiaries. Monthly premiums paid from income can qualify as normal expenditure from income (s21 IHTA 1984) — themselves exempt from IHT. Second-death policies (paying on the surviving spouse's death) are most common for married couples, as no IHT is owed on the first death between spouses.
What is a gift inter vivos plan?
A gift inter vivos (GIV) plan is a decreasing-term life insurance product that covers the reducing IHT liability on a PET over the seven-year taper relief period. The sum assured decreases each year to track the taper relief schedule. If the donor dies within seven years, the plan pays a lump sum (covering the IHT on the failed PET for that year) to the trust for the recipient. After seven years the plan expires as the PET becomes fully exempt.
Is the surrender value of an investment bond included in the IHT estate?
Yes. The surrender value of an investment bond at the date of death is included in the IHT estate and declared on form IHT400 (Schedule IHT410). The bond is valued at its open market value — the surrender value at date of death. Any income tax liability arising on the bond as a chargeable event on death is NOT deductible as an IHT estate liability — both taxes apply. Bonds held in trust are not included in the personal estate.
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