Rough guide to taxes on death

IHT – The bond forms part of the owner's estate and will be encashed (mature) as they are the last life assured. If there are two owners of the policy, then half the policy value will fall into the estate of the deceased for IHT purposes.

Income tax/chargeable gains – This will be triggered by the death of the (last) life assured and the values on this date will be used for any chargeable event calculations (irrespective of the actual date the policy is encashed). This chargeable gain will form part of the last set of accounts for the deceased. If there are two owners, half the gain will be used in the last set of accounts for the deceased.

IHT – The policy will remain in force and become the property of the owner’s estate. As the last life assured has not died the bond will continue to remain in force. However, the value of the bond at the date of death will form part of the estate of the owner for IHT purposes.

Income tax/chargeable gains – If the executors encash the policy, they will be liable for tax on gains at 20%, as the CIB is an onshore bond this tax liability will be covered by the life company tax credit. However, once the funds are passed onto the beneficiaries of the Will, the recipient will be liable for any additional tax due on the gain based on their marginal rate of tax. In this circumstance the recipient beneficiary cannot utilise top slicing, even if applicable.

An alternative could be for the executors to assign the bond, without encashing, to the recipient beneficiary of the Will. They could then continue to hold the bond until the death on the last life assured or encash at their convenience any pay any chargeable gains at their rate of tax. They also could partially encash or even gift the bond away from their ownership (creating either a PET or a CLT). In this case top-slicing, if applicable, could be applied.

IHT – Value of the ISA fund will form part of the deceased’s estate on death. The value used for probate will be that at the date of death.

CGT / Income tax – ISAs are free of CGT and income tax. In addition, the ISA wrapper can remain in place until the completion of the administration of the estate or three years and one day after death. This means for this period the deceased person’s ISA will remain CGT and tax-free.

IHT – Value of the CIA fund will form part of the deceased’s estate on death. The value used for probate will be that at the date of death.

CGT – Any CGT liability on the funds will be removed at the point of death and the fund values re-based. So, any beneficiary acquiring the CIA will acquire the funds at the probate value for future CGT calculations.

Income tax – Any interest and dividend accumulation up until the point of death will form part of the deceased’s last set of accounts. Any interest and dividend accumulation while in probate will be taxed on the executors at 20%/8.75%. Note executors do not get to benefit from personal allowances. The recipient beneficiary paid by the executors will need to claim/settle any additional tax based on their marginal rate of tax. The executor will provide the beneficiary with a form R185 to account for the tax already paid by them.

Current rules

Tax free cash lump sum, death pre age 75 – A tax free lump sum can be taken up to the available lifetime allowance. However, any excess lump sum over the LTA taken would be subject to the recipient beneficiaries’ marginal rate of tax.

Income tax, death pre age 75 – All income will be paid to beneficiaries tax-free.

Tax free cash lump sum, death post age 75 – No tax-free cash post age 75 and any lump sums taken will be subject to the recipient beneficiaries’ marginal rate of tax.

Income tax, death post age 75 – All income will be subject to the recipient beneficiaries’ marginal rate of tax.

Rules from 6 April 2024

Tax free cash lump sum, death pre age 75 – restricted by the individual's lump sum and death benefit allowance. The standard allowance is £1,073,100 that can be paid out on death. The standard allowance may be higher for people with protections. This will take into consideration all other tax-free lump sum payments the member has taken during their lifetime and on death. This will include PCLS, UFPLS, death in service and serious ill health lump sums.

Income tax, death pre age 75 – All income will be paid to beneficiaries tax-free.

Tax free cash lump sum, death post age 75 – No tax-free cash post age 75 and any lump sums taken will be subject to the recipient beneficiaries’ marginal rate of tax.

Income tax, death post age 75 – All income will be subject to the recipient beneficiaries’ marginal rate of tax.

Bond – Tax liability would only arise on the death of the last life assured on the bond.

Please remember that outside the implications of death of the settlor, these funds will also be taken into consideration for any discretionary trust periodic and exit charges.

IHT – If the settlor of the trust created the trust over 7 years ago (settlor excluded) there is no IHT liability. However, if the settlor dies before 7 years have passed, the initial value of the gift will form part of their estate on death for IHT purposes. If there are multiple settlors, the value will only relate to the gift they made.

Income / chargeable gains - If the settlor is the last life assured, or if they are UK resident at the date of the death of the last life assured and were alive, the tax liability will fall on the settlor. If the settlor has died in a previous tax year or are not UK resident the tax liability will fall on the trustees. If there are joint settlors on the death of the last life assured the above will apply individually based on half the gain for each settlor.

CIA

As there are no lives assured on a CIA there will not be a circumstance where the CIA automatically comes to an end due to the death of a settlor or a trustee.

Bond – Tax liability would only arise on the death of the last life assured on the bond.

IHT - If the settlor of the trust created the trust over 7 years ago (settlor excluded) there is no IHT liability. However, if the settlor dies before 7 years have passed, the initial value of the gift will form part of their estate on death for IHT purposes. However, if this creates an IHT liability this liability will fall to be paid by the recipient beneficiary of the trust. If there are multiple settlors, the value will only relate to the value of the gift they made. If the settlement was made from a Will, then there is no further IHT liability.

If the life assured is also the absolute beneficiary, when they die the value of the bond is theirs absolutely and so they will have to account for the bond value in their estate.

Income/ chargeable gains – This will always fall on the beneficiary of the trust as the absolute owner. The one exception to this would be if the beneficiary were a minor child when they died as the last life assured and the settlor was a parent. In these circumstances the parental settlement rules would come int effect and the chargeable gain generated on the death of the life assured (the child beneficiary) would fall on the parent(s) and not the child.

CIA

As there are no lives assured on a CIA there is no automatic closure of the contract. However, as an absolute trust the funds belong to the beneficiary if they were to die and as such any IHT would fall on the beneficiary.