Onshore bonds can help avoid inheritance tax for many British citizens – learn how they work.
Reducing Inheritance Tax with Onshore Bonds
Onshore bonds, investment products issued by UK-based providers, are gaining popularity as a solution for inheritance tax (IHT) planning. These financial instruments offer a way to grow savings while keeping taxes paid to a minimum.
One of the key advantages of onshore bonds is the tax paid within the bond. The issuing life assurance company pays corporation tax on investment returns equivalent to basic rate income tax (20%), simplifying tax treatment for the investor.
Another significant benefit is the ability to place an onshore bond inside a trust, which removes the value of the bond from your estate if you survive seven years from the date of the transfer into trust. This reduces the estate’s value for IHT purposes while allowing some access to capital if structured appropriately.
By doing so, onshore bonds can substantially reduce the estate’s IHT exposure. Flexible trusts can allow capital withdrawals or scheduled payments, offering flexibility to meet cash flow needs without triggering immediate estate inclusion.
Onshore bonds are transparent in the UK tax system and have straightforward probate and estate recognition, which can be beneficial compared to offshore bonds or other complex structures.
However, if onshore bonds are not placed in trust, their value is included in the estate and subject to IHT. Surrendering the bond triggers a tax calculation on gains added to income, but this is separate from inheritance tax considerations.
Therefore, using onshore bonds placed into an appropriate trust, surviving beyond seven years, enables them to be excluded from the estate for inheritance tax, offering a legal method to reduce the IHT burden while maintaining some capital access.
Trusts also allow the appointment of trustees who can decide how and when money from the onshore bond is paid out to beneficiaries. Onshore bonds integrated into a broader estate planning strategy can help mitigate inheritance tax and support a smoother, more structured intergenerational wealth transfer.
Onshore bonds can be assigned to family members without triggering a chargeable gain, and if the giver survives seven years, there is no inheritance tax to pay. Placing an onshore bond into a discretionary trust can help move the value of the investment outside the estate, reducing the inheritance tax bill if the donor survives for seven years.
When an onshore bond is assigned to a family member, the new owner can benefit from full top-slicing relief and any unused 5% tax-deferred allowances on any cash they take from the bond in future.
With more than two-thirds of people knowing almost nothing about how bonds can be used for inheritance planning and tax mitigation, it's clear that greater awareness and education are required to ensure clients fully understand their options and can make informed decisions about onshore bonds. Wealth manager Quilter found recommendations for onshore bonds from financial advisers have nearly tripled since the October 2024 Budget, indicating a growing interest in these financial products.
As always, it is recommended to seek tailored advice as the tax and trust rules are complex and depend on individual circumstances.
- Onshore bonds, placed inside a trust, can be an effective strategy for reducing inheritance tax (IHT) as they remove the bond's value from your estate if you survive seven years from the date of the transfer.
- Investing in onshore bonds offers a way to grow savings while keeping taxes paid to a minimum, as the issuing life assurance company pays corporation tax on investment returns equivalent to basic rate income tax (20%).
- By integrating onshore bonds into a broader estate planning strategy, you can help mitigate inheritance tax and support a smoother, more structured intergenerational wealth transfer.
- Flexible trusts can allow capital withdrawals or scheduled payments from an onshore bond, offering flexibility to meet cash flow needs without triggering immediate estate inclusion.
