What is this bond?

By THIS IS MONEY
Updated:

 

WE have been advised to consider an investment bond as part of a discretionary will trust with the intention of reducing inheritance tax. What is an Investment Bond in this situation and how does it work? IP, Cardiff.

Kay Ingram, director of financial planning at Tenon plc says: An investment bond is a combination of a whole of life insurance policy and a capital investment.

You invest a capital sum for growth (say £50,000) and then buy insurance for a larger sum (say £100,000). On death the insurance company compares the value of the investment element (which hopefully has grown) and the insurance cover, and pays out whichever is the greater.

Premiums depend on your age and are taken out of the your investment to pay for the cover. Investment bonds can be used to plan for inheritance tax liabilities by setting up the investment bond and then gifting it to your beneficiaries in trust so that it is not part of your estate for inheritance tax purposes.

The initial gift is a potentially exempt transfer (PET), and providing you live for seven years the capital amount will be fully outside of your estate, while any growth on it is outside your estate from day one. The only drawback is that if you make the PET and then change your mind you cannot get our money back without losing the inheritance tax saving.

There is no particular reason why an investment bond should be used as part of a discretionary will trust - there is no particular link between them. Discretionary will trusts involve amending your will in order to able to give away assets totalling the nil IHT rate band of one of a couple on the death of the first.

It is generally a good idea because you can in effect save up to £98,000 this way which would otherwise be payable as inheritance tax. It is worth noting because married couples commonly leave everything to each other, but if they have assets in excess of £245,000 (the level above which IHT becomes payable), when the first dies their nil rate band dies with them, and the survivor only has one nil rate band to set against the full estate.

But you do not have to use an investment bond within a discretionary will trust. Sounds like you may need further explanation of your situation. Get independent, face-to-face advice before proceeding.

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