Tax payable on death of an investment bond holder.

[Joe Bloogs]

Hello.

Q.

The life assured of an investment bond, (NOT IN TRUST), is a higher rate tax payer.

If he does not cash in the bond, when he dies does his estate pay tax on the gains he made on the policy during his lifetime, based on his personal tax status at the time of his death?

If the answer is yes, his estate could then potentially be paying IHT AND income tax on the gains on his death. Is this correct?

[bob.fraser@towrylaw.]

I am assuming that the policy is written on a single life basis.
I am also assuming that the policy-holder (the one who made the investment) is the same as the life assured.

Death is a chargeable event for non-qualifying life assurance policies (which is what an investment bond is) if a benefit arises (which it does for a single life policy).

If in the tax year in which the policyholder dies, he is a higher rate tax payer, then any gain in excess of the contributions will be taxed at 20%.

Because income tax (unlike CGT) is charged on death, there could well be the double taxation you point out.

A competent financial advisor should steer clients away from such potential pitfalls.

As a rule of thumb, investment bonds are inappropriate solutions for higher rate tax payers unless they are capable of assignment to basic rate payers, or the investor expects to become a basic rate payer himself.

Bob Fraser
Certified Financial Planner