Life Assurance Bonds – The Taxation Aspects For The Estate Practitioner

 In Finance & Investments

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… Where A Non-Trust Bond Owner Is The Deceased

Information in this article should not be taken or relied upon as personal financial advice. Any individual requiring information or advice on their own specific circumstances or on their own account should contact a suitably qualified professional.

LIFE ASSURANCE BONDS

This article will consider the way the investment value of a life assurance bond (LAB) will be dealt with after the death of the owner (or co-owner) where the owner(s) are the original investors and there are no trusts or assignments.

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Sole ownership

In the case of sole ownership, the value of the bond as an asset will pass to the estate as usual. However, whether or not the investment assets held within the LAB are liquidated will depend on whether or not the deceased is also the only life assured.

If the deceased is the sole life assured the bond will become a claim, which the issuer will settle by encashing the bond on receipt of notification of death with supporting documents and in due course paying the cash value to the executors.

If the bond has more than one life assured, it will nearly always be the case that a claim does NOT arise until the death of the last survivor and so the bond can pass to the executors, and then on to any beneficiaries “in specie”, if required. This will usually be dealt with by assignment and most issuers will supply a suitable pro forma document.

Note at this stage that Capital Redemption Bonds do not have lives assured and so a claim will never arise on death. This form of bond can therefore be treated like most other investment securities.

Joint or multiple ownership

Joint or multiple ownership LABs are subject to the same death benefit considerations, although it is highly unlikely that a jointly owned bond would be issued on a single life assured basis, so most joint bonds will remain in force on first death. The legal title to such bonds will usually be on a joint tenancy, so the ownership will pass to the survivor and typically 50% of the value at the date of death will come into any Inheritance Tax calculation.

Valuation

There is some scope for controversy in establishing the value at date of death for “with profits” bonds, which may benefit from a final or terminal bonus on death or encashment, or may even have reductions in value applied on termination.

Insurers will usually supply 2 values for such bonds at a given date, such as the date of death of an owner. One value is the “running value” and the other is the encashment value which could include a substantial terminal bonus.

If the bond is a single owner, single life assured plan, one can say with some logic that the terminal bonus should be included in the value at the date of death, as a claim will be paid. However, in situations where the bond continues, the terminal bonus is only notional, as at a future encashment date it might no longer be available. The author is not aware of any standard practice or HMRC guidance on this point.

Tax calculation situations

If a bond does become a claim (i.e. there is a single life assured or it is the death of last survivor) or if the executors decide for their own reasons to encash the bond to distribute the asset value, then a tax calculation will be required. Note here that many bonds are issued in segments, perhaps 10, 100 or even 1000 and each segment is in effect a policy with its own legal title, so it is possible to assign out value to beneficiaries in parcels of differing amounts if required, without encashing a bond with multiple lives assured. This assignment process is anticipated in much of the tax planning done when the bonds are set up by specialist financial advisers as it allows the point when tax is payable to be deferred and the ultimate tax payer to be a different person than the original owner, which may result in no tax at all being paid.

The calculation of the tax in situations where there is no trustee ownership of the LAB and encashment takes place will be the subject of the next article.

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