Unexpected knowledge for many Brits: Onshore bonds as a strategic tool to dodge inheritance tax - a guide
Onshore Bonds: Effective Tools for Inheritance Tax Mitigation
Onshore bonds, a type of investment offered by UK-based providers, are becoming increasingly popular as a solution for reducing inheritance tax (IHT). These financial instruments offer a simple and effective way to grow savings while keeping taxes to a minimum.
When you gift an onshore bond, either outright or via a trust, the value of that bond moves outside your estate for IHT purposes, provided you survive for seven years after the gift. This can significantly reduce your potential IHT bill.
Placing an onshore bond into a discretionary trust allows you to appoint trustees who control how and when the funds are paid out to beneficiaries. This offers control and flexibility, especially if you do not want to give the money outright but still reduce your taxable estate.
Key benefits when onshore bonds are written in trust include:
- IHT mitigation through the seven-year survival rule: Once gifted into a trust, if you live seven years, the bond value is generally excluded from your estate, reducing IHT liability.
- Control over distributions: Trustees decide the timing and recipients, which can protect the assets and provide structured intergenerational wealth transfer.
- Tax advantages on withdrawals: The trust can utilize the 5% tax-deferred withdrawal allowance each year, enabling withdrawals without immediate income tax liability and potentially reducing tax exposure on gains.
- No immediate capital gains tax on assignment: Onshore bonds can be assigned to family members or trusts without triggering immediate chargeable gains, which can be advantageous for tax planning.
- Flexibility to assign parts of the bond: If structured as clustered policies, trustees can assign whole or part bonds to beneficiaries later, enabling further tax efficiencies and administrative ease.
Experts emphasize that onshore bonds written in trust combine investment growth potential, tax efficiency, and inheritance control and are increasingly important in holistic estate planning. Using them within a broader strategy can help smooth and structure wealth transfer, while educating clients on these tools remains a key challenge.
In the 2024 Autumn Budget, significant changes to IHT were introduced, including making defined contribution pensions liable for IHT from April 2027 and introducing new caps on business and agricultural relief. These changes highlight the importance of understanding and utilizing tools like onshore bonds for effective IHT planning.
According to research, more than two-thirds (67%) of people know almost nothing about how bonds can be used for inheritance planning and tax mitigation, and a significant number of people (47%) plan to pass down their wealth to future generations. With this in mind, it is crucial to educate clients on the benefits and workings of onshore bonds as part of a comprehensive estate planning strategy.
Wealth manager Quilter has found that recommendations for onshore bonds from financial advisers have nearly tripled since the October 2024 Budget. This suggests that more people are becoming aware of the benefits of onshore bonds and are seeking advice on how to incorporate them into their estate planning strategies.
In conclusion, onshore bonds offer a valuable option for IHT reduction and can be a key component of a well-rounded estate planning strategy. By understanding the benefits and workings of these financial instruments, clients can make informed decisions and take advantage of the tax-deferred withdrawal advantages, IHT mitigation, and control over distributions that onshore bonds provide.
- Onshore bonds, popular for their tax-reducing properties, are a form of investment that can be incorporated into a comprehensive personal-finance strategy.
- Placing an onshore bond into a trust not only provides IHT mitigation but also grants control over distributions and tax advantages on withdrawals, allowing for structured intergenerational wealth transfer.
- Wealth manager Quilter noted a significant increase in recommendations for onshore bonds from financial advisers, underscoring growing awareness of their benefits in inheritance tax (IHT) planning.
- Given the upcoming changes in defined contribution pensions and IHT laws, understanding the role of onshore bonds in finance becomes increasingly vital for effective wealth-management and estate planning.
