Investment Bond and Estate UK (2026): Income Tax on Death, IHT, and What Happens to an Investment Bond When Someone Dies

An investment bond (also called a 'single premium investment bond' or 'life assurance bond') is a single-premium whole-of-life insurance policy used as an investment vehicle. They are commonly sold by insurance companies (Aviva; Legal & General; Prudential; Scottish Widows; Old Mutual/Quilter; Royal London; Canada Life; etc.) as a tax-efficient way to invest a lump sum. Key features: (1) SINGLE PREMIUM: a lump sum (e.g. £50,000-£500,000+) is paid in; the policy invests in a range of funds; (2) LIFE ASSURANCE WRAPPER: the policy provides nominal life cover (typically 101% of fund value on death), this wrapper gives it specific tax treatment under ITTOIA 2005 Part 4 Chapter 9 (ss.466-554); (3) 5% ANNUAL CUMULATIVE ALLOWANCE: policyholders can withdraw up to 5% of the original premium each year without triggering an immediate tax charge. Unused allowance carries forward. This allows income drawdown for up to 20 years without immediate income tax (the gain is deferred, not exempt); (4) CHARGEABLE EVENT GAINS: income tax arises on a 'chargeable event', including: (a) full surrender; (b) death of the policyholder; (c) assignment for money or money's worth; (d) excess withdrawals (withdrawals above the 5% annual allowance); (e) maturity of the bond. The gain is calculated as: proceeds (or deemed proceeds) minus premiums paid minus earlier chargeable event gains; (5) TAX TREATMENT DURING LIFETIME: investment bonds are not subject to annual income tax or CGT on fund growth within the wrapper. Tax is deferred until a chargeable event. This makes them attractive for higher-rate taxpayers who expect to be basic-rate taxpayers later (e.g. in retirement), deferring a gain to a year with lower income reduces the income tax rate applied. However, tax is not avoided, it is deferred; (6) DIFFERENCE FROM OTHER INVESTMENTS: unit trusts and OEICs: annual income tax and CGT apply as income is received; ISAs: income tax and CGT exempt, but no IHT protection; investment bonds: income tax deferred until chargeable event; no CGT (income tax applies instead); IHT applies to fund value at death.

The death of the policyholder is a chargeable event under ITTOIA 2005 s.484(1)(d). A chargeable event gain arises and is assessed for income tax: (1) THE CHARGEABLE EVENT GAIN ON DEATH: the gain is calculated as: (a) The surrender value of the policy on the date of death (or the death benefit payable, usually 101% of fund value); MINUS (b) The total premiums paid over the policy's lifetime; MINUS (c) Any earlier chargeable event gains that have already been assessed. If the result is positive, a chargeable event gain arises; if the policy has fallen in value (surrender value less than premiums), no gain arises and no income tax is due; (2) WHO IS ASSESSED: the chargeable event gain on death is assessed on the personal representatives (PRs) of the deceased, not the beneficiaries. The PRs include it on the estate's Income Tax Self Assessment return (SA900) for the tax year of death. The gain is treated as arising in the tax year of death; (3) THE 20% DEEMED PAID CREDIT (UK BONDS): for UK-issued investment bonds (onshore bonds), the insurance company has already paid corporation tax on the fund growth inside the bond (at a rate treated as equivalent to 20% basic rate income tax). This is called the 'deemed tax credit' or 'tax credit'. The 20% credit means: basic rate taxpayers: no additional income tax to pay (the 20% deemed credit covers the liability). Higher rate taxpayers (40%): 20% tax to pay on the gain. Additional rate taxpayers (45%): 25% tax to pay on the gain. Personal representatives: pay income tax at 20% on the gain, but the 20% deemed credit means no additional tax in practice for PRs. If the gain pushes the estate into higher rate territory: additional tax arises; (4) OFFSHORE BONDS: offshore investment bonds (Luxembourg; Dublin; Cayman Islands domiciled policies) do NOT have the deemed paid credit. The full gain is assessed without any credit, income tax at the PR's (or beneficiary's) marginal rate. For a higher-rate taxpayer PRs: 40% on the full gain. For an estate with no other income: 20% basic rate applies. Offshore bonds are popular for high-net-worth investors because they allow complete deferral of all income tax during the life of the bond (no deemed credit being charged during the accumulation phase), but the full gain is taxed on a chargeable event; (5) CALCULATING THE GAIN, EXAMPLE: original premium paid £200,000 in 2010; no additional premiums; no previous chargeable events; 5% annual withdrawals taken 2010-2025 (total £150,000 withdrawn). Surrender value on death: £320,000. Gain calculation: £320,000 + £150,000 (withdrawals) − £200,000 (original premium) = £270,000 gain. UK bond: PRs receive 20% deemed credit; higher-rate additional tax on gain above basic rate. Note: in practice the bond provider will issue a chargeable event certificate (CEC) with the exact figures.

Top-slicing relief is a mechanism under ITTOIA 2005 ss.535-537 that can reduce the income tax payable on large chargeable event gains by calculating the tax as if the gain had been spread over the number of years the bond was held. It prevents a one-off large gain from pushing the taxpayer into a higher tax band for a single year: (1) HOW TOP-SLICING WORKS: the chargeable event gain is divided by the number of complete years the bond has been in force (the 'top-slice'). The tax is calculated by: (a) adding the top-slice to the taxpayer's other income for the year; (b) calculating the tax on the top-slice (the 'fractional gain'); (c) multiplying the tax on the fractional gain by the number of years the bond was held to find the total tax liability. Example: gain = £120,000; bond held 20 years; top-slice = £6,000. Taxpayer has £30,000 other income. Without top-slicing: the £120,000 is added to income; large portion falls in higher rate band at 40%. With top-slicing: the £6,000 slice is added to the £30,000; this may stay within the basic rate band; the rate on the £6,000 slice is applied to the full £120,000, potentially saving tax significantly; (2) TOP-SLICING ON DEATH: top-slicing relief IS available to the personal representatives for the chargeable event gain arising on death. The PRs apply the relief on the estate's tax return (SA900). The number of 'complete years' for top-slicing purposes is the number of complete policy years from the date the bond was issued to the date of death; (3) PERSONAL ALLOWANCE AND TOP-SLICING: following HMRC v Silver (2019) and subsequent clarification, top-slicing calculations can use the personal allowance in the year of death (£12,570 in 2025-26) to reduce the gain before applying the top-slice, subject to income abatement. A lower total gain reduces or eliminates higher-rate exposure; (4) OFFSHORE BONDS AND TOP-SLICING: top-slicing relief also applies to offshore bond gains, the same calculation applies, but without the 20% deemed credit, meaning the full gain is assessed at the taxpayer's marginal rate (minus the top-slicing benefit); (5) CHARGEABLE EVENT CERTIFICATE: the bond provider issues a Chargeable Event Certificate showing the gain, the number of years (for top-slicing), whether it is an onshore or offshore bond, and the deemed credit amount. The PRs must include this on the estate's tax return.

Investment bonds are fully included in the estate for Inheritance Tax purposes at their surrender value on the date of death: (1) IHT VALUATION: the IHT value of an investment bond is the surrender value, the amount the policy would pay if encashed on the date of death. This is not the death benefit (which is typically 101% of fund value), IHT is assessed on the surrender value (which for most bonds equals the fund value). The bond provider can supply a date-of-death valuation; (2) IHT EXEMPTIONS: the standard IHT exemptions apply. Gifts of the bond to a spouse or civil partner: IHT-exempt (spousal exemption IHTA 1984 s.18). Gifts to charity: IHT-exempt (IHTA 1984 s.23). No specific IHT exemption applies to investment bonds held in the deceased's estate, they are treated as any other investment asset; (3) TRUST-HELD BONDS, IHT BENEFITS: if the investment bond is held in trust during the policyholder's lifetime, the IHT position changes fundamentally. A bond written into a discretionary trust during the policyholder's lifetime is: (a) outside the deceased's estate for IHT purposes (provided it was a genuine trust arrangement and the settlor did not retain benefit, avoiding IHTA 1984 s.102 gift with reservation); (b) subject to the trust's own IHT regime, periodic charges (every 10 years) and exit charges under IHTA 1984 ss.64-69; (c) no chargeable event gain arises on the settlor's death (because the policy is not the settlor's asset); the chargeable event gain arises when the trustees later surrender the bond or a chargeable event occurs within the trust; (4) BOND NOMINATION, NOT THE SAME AS A TRUST: most investment bonds allow the policyholder to complete a 'nomination of beneficiaries' form. This is NOT a trust and does NOT remove the bond from the estate for IHT. Nominations typically only affect who the insurance company deals with, they do not prevent the bond's value being included in the estate for IHT. To remove an investment bond from the IHT estate, it must be formally placed into a trust (ideally at inception); (5) THE 5% ALLOWANCE AND IHT PLANNING: withdrawals under the 5% annual allowance taken during the policyholder's lifetime reduce the fund value and therefore the IHT-chargeable value on death. Each year's income withdrawal reduces the future estate. However, any gain arising from the withdrawals (if cumulative withdrawals exceed the total 5% allowance used) is a chargeable event. The reduction in estate value from regular withdrawals is a by-product of using the bond for income, it is not a designated IHT planning tool.

Investment bonds require specific consideration in wills and estate planning: (1) INCLUDE THE BOND IN YOUR WILL: unlike pensions (which pass via nomination forms), investment bonds are part of the deceased's estate and pass under the will (or intestacy). The will should specifically name the bond or use residuary estate provisions. Consider: (a) Who should inherit the bond, a basic rate taxpayer (e.g. a child) may be better placed to receive the bond and cash it in with less income tax than a higher-rate taxpayer beneficiary; (b) Whether the beneficiary should cash the bond immediately or hold it (deferring the remaining gain); (2) GIFTING THE BOND INTO TRUST DURING LIFETIME: placing the bond into a discretionary trust during the policyholder's lifetime: (a) removes the value from the IHT estate (provided no benefit retained, IHTA 1984 s.102); (b) creates a CLT for IHT, if the value exceeds the nil-rate band at transfer, lifetime IHT at 20% applies; (c) is a chargeable event for the bond (a deemed surrender and recommencement), a chargeable event gain may arise at the point of transfer; (d) subjects the trust to the relevant property regime (periodic and exit charges IHTA 1984 ss.64-69). The trust approach is complex and requires specialist advice; (3) ASSIGNING THE BOND TO A BENEFICIARY: assigning (transferring ownership) the bond to a beneficiary during the policyholder's lifetime: (a) is a chargeable event (assignment for money or money's worth triggers a gain); (b) note: assignment to a spouse or civil partner is NOT a chargeable event (ITTOIA 2005 s.493); (c) the beneficiary takes over the policy and future gains become their liability; (4) MULTIPLE LIVES ASSURED: if the bond was taken out on two lives assured (e.g. both spouses), a chargeable event does not arise on the first death, the bond continues to the surviving life assured. IHT on first death: the value of the bond IS included in the first estate (it is an asset of the deceased). However, if it passes to the surviving spouse, the spousal exemption applies; (5) SEEK SPECIALIST ADVICE: investment bond taxation is complex, particularly on death, and the interaction between chargeable event gains, top-slicing, the 20% deemed credit, and IHT requires specialist advice. The bond provider will supply a Chargeable Event Certificate with the precise figures for the estate's tax return.