Using Trusts to Reduce Inheritance Tax

In today’s Express, they look at the use of trusts and investment bonds as part of inheritance tax planning.

Statistics suggest that HMRC is collecting a larger percentage of our income than at any other time in the past 70 years.

To put it in numbers:

  • The government is projected to collect a staggering £7 billion in inheritance tax this year alone.
  • The threshold for inheritance tax, known as the ‘nil-rate’ threshold, has remained static at £325,000 since 2009. This is concerning given the rise in the value of assets like property and shares over the same period.
  • Furthermore, Hunt’s recent changes have drastically reduced capital gains tax allowance from £12,300 to a mere £3,000 by next April. Simultaneously, the dividend tax allowance was cut in half to £500.

All of these changes spell out one clear message for families: rising tax bills. But this is where investment bonds come into play.

The Magic of Investment Bonds

Single premium investment bonds, once a cornerstone of tax planning, have somehow slipped into obscurity. But as Shaun Moore, a tax and financial planning expert at Quilter, explains, they are making a comeback.

What are they? Investment bonds, often associated with a tiny bit of life cover, are primarily financial products designed for investment. Sold by either life insurance companies or independent financial advisers, these bonds allow you to invest a single upfront premium, typically starting at £5,000 or £10,000.

How do they work? Your investment gets diversified into several funds, aiming to provide both consistent dividend income and capital gains. A significant advantage is that there’s no need to report returns to HMRC annually. Taxes only come into play during a “chargeable event”, like cashing in part or all of the bond.

One of the standout features of these bonds is the flexibility they offer. You can retrieve five percent of your initial premium every year for up to 20 years without incurring any tax. Additionally, they don’t have a fixed maturity date, allowing you to decide when to sell and optimise for tax efficiency.

Inheritance Tax Planning with Investment Bonds

Moore also points out that these bonds can be incorporated into trusts for inheritance tax planning. By gifting them, there’s no immediate obligation to pay income or capital gains tax. Furthermore, these bonds can assure multiple lives, granting extensive control over when the bond concludes and when tax becomes due.

There are two types of these bonds – onshore and offshore. Their main distinction is in how they’re taxed. Onshore bonds are under UK corporation tax, while offshore bonds accumulate returns tax-free. However, with offshore bonds, there’s no 20 percent basic rate income tax credit. This means that depending on your tax bracket, you might pay 20, 40, or even 45 percent as income tax.

Things to Consider

While single premium insurance bonds present an enticing tax planning opportunity, it’s important to approach them with caution. Seeking financial advice is essential to maximise their potential.

Remember to weigh the costs: ensure that advisory fees and bond charges don’t diminish your tax savings. And while they are a powerful tool, don’t forget other tax-efficient options like pensions and ISAs.


As the tax landscape grows ever challenging, it’s crucial to be proactive in protecting your family’s wealth. Single premium investment bonds offer a potential shield against rising taxes, but as with all financial decisions, it’s vital to do your research and consult experts. After all, safeguarding your family’s financial future is worth the effort.